OTP Bank Nyrt. ($OTP)

Ladies and gentlemen, welcome to OTP Bank's First Quarter 2026 Results Conference Call. Please be advised that this event is being recorded. [Operator Instructions] At this point, I would like to hand over the floor to Mr. Laszlo Bencsik, Chief Financial and Strategic Officer. Laszlo, the stage is yours.

Thank you. Good morning or good afternoon, depending where you are, and thank you for joining us today on OTP Group's 2026 first quarter results conference call. You have the stock exchange report, the analyst tables and today's presentation available on the website. And we are also broadcasting the slides, as usual, as part of this video call. As usual, I will make an attempt to summarize the main development of the events during the first quarter, and then we will open the floor for your very good usual questions. So the first page, it has been pretty stable for a long number of years now, which I think is a good sign, by the way. I think it's quite good that the most important kind of headline features of OTP Group have not changed. And we don't intend to change those. So we are working hard to -- for these features to continue to dominate our performance. So I'm not going to elaborate too much on this because I'm sure you know it by heart now. Well, talking about first quarter results. Unfortunately, just like in previous -- last couple of years, the first quarter result is very in a way confused and is confused by the huge one-off or kind of the huge extra taxes we have to pay in Hungary especially and the fact that we have to account for all these taxes at the beginning of the year, we are now allowed to accrue them accounting-wise. And in case of extra profit tax, the number we have to look in the first quarter is even bigger than the expected number for the whole year because we -- as you probably know, the system is such that if we acquire a certain amount of government -- Hungarian government bonds, then we can reduce the tax payment, but this eligibility to reduce the tax payment is measured as time goes by during the year on a monthly basis, basically. So we have to fulfill that criteria month by month in order to qualify for these reductions. So the full reduction actually will only be reflected in the full year results. By the way, for you, I think it's an important information that we have acquired the additional Hungarian government bonds, so we expect the deductions or the reduction of the ex profit tax to actually happen according to our expectations. Now because of these charges we booked for a whole year in the first quarter, the actual kind of representative numbers of our performance and the book numbers in our financial reports differ. And therefore, on this slide, you can actually see both set of numbers. So the darker green or the dark green number is -- reflects numbers where we accrue these one-offs over the full year. And this probably, I mean, for sure, provides you with a better representation of actual performance, whereas the gray numbers are the ones which are in the financial reports. And then you can see the tax gray number on this slide as well, trend up year-on-year by 30%. And again, this is mostly 2 factors. One is the substantial increase, in fact, doubling of the extra profit tax in Hungary and also the higher tax rate in Ukraine. You may remember last year was a decision in Ukraine that they increased the tax on bank's profits 50% last year, that was [ 125 ]%. So I mean, this kind of adjusted number grew 9% year-on-year. On the next slide, you will see that actually, FX adjusted, this number grew 13%. We can still go back -- sorry, to the previous one, yes. And I think from now, and we will have to take into consideration the exchange -- the half rate impact, especially when we compare to previous year numbers, our performance just because the half has gone through quite an appreciation very recently, and that obviously has an impact on our numbers. So the ratios, return on equity, again, this adjusted one performed quite well. Cost-to-income ratio slightly better than whole year last year, but worse than first quarter last year. And most importantly, net interest margin continued to somewhat increase compared to last year, but also compared to the fourth quarter last year. And portfolio quality remained stable with a kind of normal level of risk cost on the credit risk cost rate side, and we actually wrote back part of the provisions we previously created in the Russian government bonds, almost EUR 20 billion half equivalent provisions were released after the payment of the maturing bonds at the end of last year. And therefore, the Other risk cost was actually a positive number and the dollar risk cost was also a smaller number. Now if we go now to the following page, where we actually present the FX-adjusted changes quarter-on-quarter and year-on-year on a -- I mean of the first quarter numbers. And if you look at this at the end of this presentation, we have cross sections for each of these lines. I mean the most important P&L line. So by country, you can also see these numbers on -- typically on an FX-adjusted level as well, at least where it's relevant and it's mostly relevant obviously to the Europe related countries. So maybe it makes more sense to actually elaborate on this FX-adjusted changes. So year-on-year, if you compare the first quarter this year, '26 through last year, there were no acquisitions or disposals. So it's a kind of apple-to-apple comparison, 13% overall profit after tax increase. Operating profit improvement, 9%, and there was some moderation in the risk cost, mostly because this release of provisions on the Russian government bonds, what I just mentioned. I think in the revenue lines, there are some important developments. First of all, net interest income up 17%. And this has been driven by double -- mid-teens volume growth in the loan book and also improvement in the net interest margin overall on a group level. So that's, I think, a pretty strong performance. And again, this is all organic. Now on the other hand, on the net fee and commission line. You see only 1% year-on-year growth, which is somewhat -- I mean, obviously, a much lower growth rate than we would expect given the nominal GDP growth of the countries where we operate and given the overall volume growth both in deposits and in loans across the group. Now there are 2 important factors here. One, is coming from Russia. In Russia, year-on-year, net fees and commissions went down by more than 20%. And this is related to the transactional income, what we generate in transactions, there's lower demand for typically for the corporate transactions we provide for our typically European corporate clients in Russia, there is a decline there. So those of you who wanted to see our Russian revenues declining and transactional activity declining, it actually has started to happen. And this is not a unique feature to OTP. This we see, if you look at the numbers of other kind of European banks operating in Russia as well. The other factor was that in Hungary, there was a moratorium in the first half of this year on the fees. So we were not allowed to adjust from the start of the year despite the legal potential or opportunity. There was a strong, so let's say, pressure on the bank sector, not to apply those increases. So this is going to happen only in the second half of the year. So from July, basically, we do apply the CPI increase on our fees in Hungary. So hopefully, the Hungarian numbers in the second half of the year will show a better performance. And there's one other factor here that this very high level of mortgage lending activity generated not just higher volumes and therefore, higher future revenues, but also higher commissions to third parties. So this higher commission number also kind of is reflected here in this number when you look at the Hungarian growth rate, which is only 1% year-on-year, again, due to these -- these 2 factors that we had to delay the fee increases by 6 months, and we also incurred quite sizable commission fees on the new lending on mortgages. But again, the NII line, I think that's quite strong and is probably the most important in this sense in the close to 10% operating profit increase as well. The next one, the next slide is rather technical. For those of you who are interested in the exact numerical details of the difference between the reported number and this kind of even recognition of special items adjusted line. So those are the differences and most of the differences, as you can see, come from Hungary, and it's due to the windfall tax mostly, right, which was booked in the first quarter, EUR 135 billion, EUR 136 billion. But again, the annual number we expect to be only EUR 110 billion, and then the actual number relevant to the first quarter was EUR 26 billion. So that causes this. Now this big difference is -- again, it's in Hungary, and therefore, the Hungarian numbers, which you can see on the following chart, have been even more sort this accounting treatment. So again, we actually had losses due to the windfall tax and the other taxes in Hungary in the first quarter. But if we do this adjustment and the number was actually positive EUR 120 billion, which is quite a sizable loss year-on-year. Having said it, I think it's -- I have to highlight here that the -- most of this positive impact from the provision release behind the Russian government bonds happened in Hungary. There were some in Bulgaria. But bulk of this almost EUR 20 billion release happened in Hungary, and there is also pretax, EUR 19 billion fair value positive adjustment on the subsidized loans in Hungary due to the movements of the yield curves basically or the yield curve movement, there was a positive effect in the first quarter. And those 2 appeared in the Hungarian numbers in the first quarter and those 2 may not appear in the second and subsequent quarters in Hungary. Now -- and that actually resulted in this high jump in return on equity, again, using this kind of adjusted numbers. So it's unlikely that we are going to continue to have this level of earnings in Hungary for the remaining of the year, it may kind of moderate back to the previous line. Net interest margin, on the other hand, kept improving, and that's -- although the improvement on a quarterly basis is quite slight, but at least positive. And again, risk cost rate overall was actually negative provision write-back. Again, this is due to this kind of Russian bonds provision lease. And here in the kind of right lower quarter, you can see the taxes ex the taxes is our expectations related to we are going to pay for each of these tax lines during the course of the year, and those expectations have not changed. Maybe a few deeper thoughts about Hungary and the Hungarian operations, the subsidized mortgage program, which is very popular, continues and these are the new application volumes. As you can see, as expected, new applications in the first quarter were somewhat lower than the previous quarter, but still more than double the last year first quarter numbers. So it's still very strong. And our market share is also you can see from the contracted amount, our market share jumped up to higher than 40%. Before the introduction of this program, it was in the low 30s. And by the way, this is quite typical. So we tend to have much higher market share in case of subsidized programs than on the market-based structures and that's primarily because these are typically more complicated products, the sales process, the client interaction is much more complicated, requires more resources, more scale the sources more physical presence and overall scale in order to be able to handle the sudden dramatic increase in demand and we are typically much better positioned to provide these this performance than some of the other banks. So that's the reason primarily. In other products, cash flows and savings deposits, any market share in newly contracted cash flow, somewhat declined, and that's due to basically price competition. There's increasing price competition in this segment and try to balance or maximize future earnings by positioning our price points in a way that we, again, maximize the NPV of production, and that resulted in a somewhat lower market share. But the kind of year-on-year growth of new production is still quite strong, 17%. And in baby loans, as you can see, we have also quite remaining high market share. Having said that, even more important on this slide, I think probably the most important in Hungary is that we continue to increase our retail deposits market share and despite of the very low rates, what we provide, what all the banks provide. And we consider this number extremely important because we consider that this number is probably the best gauge to such as how deep and strong bank and action is with retail line in a given country. And this number going up and has been going up for quite a long time. So that's very positive. Corporate, similar positive news in Hungary, our market share in corporate loans continued to increase, and it has again reached a historic high 21.6%. And you can also see the kind of long-term development there, which is very positive. The other good news is that in line with the, I would say, somewhat positively surprisingly high first quarter GDP number in Hungary, corporate [indiscernible] continued. Overall, it was 2% on a quarterly level, which is somewhat a slowdown compared to the second half of last year, but still much more than what we grew altogether in [ '26, '24. ] But most interestingly, micro and small volumes that continued to grow. And actually, the growth rate there accelerated considerably 6% growth in just 1 quarter, and this is the micro small sector. Again, that's quite promising when you want to have a view on the kind of fundamental activity level in the local economy, the local corporate sector to this day because micro small are typically local part of the large corporates, mid-corporates are obviously multinationals as well and -- or kind of the sector, which is serving multinationals. Page 10, you have an overview of the performance of the various units, the various countries across the group. It is solid performance. However, typically not better than last year with the exception of Uzbekistan, which managed to improve profitability, and this is good. ROE is closer to 30%. So that's actually quite promising and we are quite happy to see these numbers. And we had a big decline in profitability in Russia. Again, this is related to what I just explained, the demand for this corporate transfers and FX conversions solid decline and that reflects in our numbers. Now if we go to Page 11, where you can see the net interest margin development on a quarterly basis, 11 basis points up. And as you can see, small improvements in Hungary, Bulgaria, Uzbekistan, Russia and a bigger chunk of this improvement actually came from the composition effect, namely higher-margin countries provided higher growth rates in the first quarter. And it's not just the quarter-on-quarter, but also the year-on-year number, which has grown a lot. And here, obviously, the contribution of the Hungarian business is much better. So more than half of the margin improvement while we can see year-on-year came from the Hungarian business. Our rate sensitivity has increased primarily because of -- and especially in Hungary because of very rapid growth of deposits, you will see the deposit growth rates in Hungary in the first quarter, and that's obviously very, very good in terms of profitability and earnings. But somewhat increased in the half rate sensitivity, which now stands at EUR 24 billion annualized NII in case of the 100 basis points change or, in this case, the potential decrease in the rate environment. And likewise, in the euro, sensitivity went up to EUR 125 million annualized NII potentially, in fact, based on 100 basis points. Now looking at loan growth, it was 3% in the first quarter was actually 3.4%, but we have kind of round numbers here. So this was rounded down to 3%, but actually, it was 3.4% FX-adjusted performing loan growth, which was quite in line with our expectations, and some countries provided actually quite remarkable performance. Actually, I mean the good news is that these are the 3 biggest countries Hungary, Bulgaria and Slovenia in the group who had a very strong performance, 5%, 4%. Just to remind you, last year, the whole year, Hungarian loan growth was 17%, Bulgarian 18% and Slovenia was 8% for the whole year '25. Now in this case, Hungary first quarter 5%, Bulgaria 5%, Slovenia, 4% and in Hungary, this is primarily -- I mean, to a large extent given by the mortgage -- subsidized mortgage program, but there's no such program in Bulgaria or Slovenia. The other country which kind of grew quite fast was Ukraine, 9% growth. And now we actually -- I mean, last year, we had a decent growth as well. Last year, there was 27% annual growth. Therefore, the base is getting bigger as well. And on a higher base, now we have an acceleration in the run rate in Ukraine, which is, again, fairly good news. Deposits, 3% increase in deposit volumes just in one quarter and especially Hungarian retail was strong. This is not surprising given that it was a the last quarter before the elections. And therefore, some fiscal transfers happen to the electorate and quite part of it actually landed in bank deposits. So this is -- I don't think I have to tell you that this is actually very positive for earnings and NII specifically. So I think this is the kind of biggest news on the deposit front. Portfolio quality, Page 14, remains stable, slight improvement in the Stage 3 ratio in the first quarter down to 3.4%, 2.6% without the higher NPL ratio, countries like Russia, Ukraine and Uzbekistan. Coverage remained similarly high to previous quarters. So there's not much event here. Next page is about in the capital adequacy ratio, which actually decreased to -- from 18.1% to 17.6%, the common equity Tier 1 ratio. And in this waterfall, you can see the factors which affected this ratio. So the profit itself would have increased the ratio by 90 basis points. But in case the one-offs, these large taxes were we count it for evenly during the year, but they were not. So this kind of accounting for all the taxes in the first quarter that had a 40 basis point negative impact and the dividend, which we calculate according to the EU regulations. So this is not a guidance on the potential dividend payment. Organic growth consumed 40 basis points and some temporary measures we have phased out. So that's another 30 basis points negative, and there were some other effects. But the bottom line is if that order the reported number was 17.6%. If we recalculate these one-offs, again, evenly distribute over the year in Hungary, this kind of adjusted profit number, and we recalculate the adequacy ratio with the restated number, then the rounded number was actually at 17.9%, so close to 18%. And in comparison to, I mean, just anticipating the discussion about why our capital adequacy is or is not indeed, the 17.6% even in our Tier 1 ratio level seems to be quite strong. And here, we can account for -- I mean, we can say that again, the real number was probably or the kind of -- the number which better reflects our -- the actual situation was closer to 17.9%. And that's quite a decent number. And that created some room to again restart share buybacks. We just announced that there was another $60 billion half approval we received from the National Bank. So we have now -- we can sell a new program to continue to buy back shares and the approved number was EUR 16 billion [ half ]. And ultimately, there's some room for more acquisitions as well, given this higher ever ratio if there was an opportunity to do so. On Page 17, you can see the liquidity and the capital markets activity of the group. Liquidity ratio is very good. We remain to be funded by deposits, right? I mean loan-to-deposit ratio pretty stable across last year. and liquidity coverage ratio 227 net stable funding ratio, 151, so quite strong levels and relatively compared to the size of the the profits and the size of the balance sheet, the call date profile is relatively modest. So there's EUR 1.1 billion called it coming through this year and the overall share of wholesale funding in the balance sheet is still less than 10%. It's 8%, as you can see at the bar on the chart in the right corner. So we are not not really levered at all in terms of market funding. Rating. There has been no changed recently. I mean this is obviously an interesting topic. Probably heard about the new government in Hungary and the plans, the economic policy plans of the new Hungarian government. They seem to be quite serious about targeting the preparation for Eurozone accession and they want to meet the mastery criteria, accession criteria. We said in 4 years. And that obviously assumes a trajectory, a fiscal trajectory, which may open up the space for hopefully or rate improvements in the submarine, which may hopefully reflect in our rating as well. But this is to be seen, right? So we will see how it goes and how it develops. And I'm going to talk a little bit about our expectations in terms of Hungarian macro later in the presentation. I mean these are the next 2 slides, the ones we always include just to reinforce our message that we -- it's not only us to consider our performance to be reasonably good, but some other external objective views as well seem to confirm that, and it's researched the EBA Cestas is up and then sustainability and green lending, which is our Page 21, which is our strongest focus in terms of sustainability to contribute to more [indiscernible] in terms of doing green lending, and we achieved the quite ambitious target, what we said a couple of years ago, at the end of last year. And even compared to that, there was an acceleration in the growth rate. And just in 1 quarter, we achieved a 9% growth in green lending volumes. If it continues like this, and we will, I'm sure, surpass the targets that we set and achieve them much earlier, which is a good news. Now macro -- and in our case, there are obviously 2 large developments. One is a global development, and that's the war in Iran and the situation, the closure of traffic in the Strait of Hormuz and the impact of that situation on global energy prices and the expectations regarding future energy prices. And this is -- obviously, we don't know what the future will bring here and its expectations change day by day, depending on the communication primarily from the President of the United States and our assumption or other hope is that what we base our numbers that the Strait will open soon. And in the second half of the year, there will not be much disruption in the traffic across the street. And that means that we expect the gradual normalization of the energy supply globally and therefore, the gradual normalization of the energy prices over the course of the second half of the year. So these numbers are based on that assumption. Obviously, there's a risk here that it's the situation is not going to ameliorate. And in that case, obviously, GDP growth may be lower due to higher energy prices and inflation might be higher and the rate environment might be higher as well. I mean -- and this is potentially true for all the countries on this page except Russia, which Russia would be the benefactor, the beneficiary of such a high energy price environment, obviously. But all the other countries will be potentially negatively or at least marginally negatively me and some of these countries even more negatively impact. Now based on this assumption. And I think here, the most important numbers are the Hungarian ones -- can we go back? Sorry. Yes. So the biggest -- the number has changed the most is the expected fiscal deficits in Hungary. It's up to 6.8%. This is the latest indication from the former government and from the new government as well. But they do now, the new government just took office this week and they are going to, I mean, review the fiscal situation and come up with a new budget basically for this year during the course of the summer. So this number may or may not be reinforced, but actually I think this is a -- I don't expect a lower number than this. I think it all goes well, and it's not going to be higher than 6.8%. It seems that the previous government spending had been excessive before and going up to the election and certainly the higher energy price also [ are happening ] here. But despite all of this, I mean, actually, the first quarter GDP growth in Hungary was surprisingly strong or somewhat better than most of us expected. And therefore, even with this kind of -- in this environment, we expect closer to 2% GDP growth, which is the highest number over the last 4 years. And then obviously, the macro expectations regarding Hungary changed considerably based on the newly elected government, which has 2/3 majority in the parliament, and therefore, they can change technically any -- all the legislations are obviously in line with EU -- the EU legislative framework. And that, again, there seem to be a commitment to converge to the Eurozone and to converge to kind of Western European standards. And this is an environment, which maybe not in very short term, but mid- to long term is actually quite supportive and positive for the potential growth and also for fiscal deficit decrease and also for inflation decrease and for the rate environment to go lower. And in that scenario. I mean, growth expectations, probably increase in Hungary and margin expectations somewhat moderate, but that is kind of compensated by the cost cost of capital or expected to our numbers also going lower, potentially the next couple of years due to lower rate environment. What short-term potential most important is the access to EU funds. And we put here a slide to facilitate your understanding of what we are talking about when we talk about access to EU funds. So this EUR 36 billion, and Hungarian GDP is like 220. It was EUR 219 billion versus was last year number. So this is -- this is actually a sizable amount of money what is at stake now. And there are different parts of it. So they are grants and there are loan facilities, access to loan facilities at a much cheaper level than the Hungarian sovereign cost of funding is at the moment. And these are the different parts. So the most urgent is the recovery and resilience facility ground subsidy EUR 5.8 billion, and the repower EU, again, subsidy, which those have been suspended and they are subject to fulfilling 27 milestones. These are 27 requirements regarding the legislative environment basically in the institutional environment in Hungary. And those have to be changed according to these expectations to get access to these funds. And in case of the RRF grant and the repower EU, the deadline is actually very close. So by the end of August, Actually, the payments have to happen, and that's a short time frame. So it requires fast legislative changes, which is quite feasible. So there's -- and pretty much it seems that the new government intends to make those, so that's not a kind of a problem, but it also requires some level of flexibility on the EU side, to actually provide those funds despite the fact that these projects have not obviously been completed, and therefore, some more creative solution is needed. But I think chances are good that we -- these funds will be available. And there's a lower facility as well linked to the recovery in resilience, RF facility, net EUR 3.9 billion. And as the usual structural and investment funds. That's the usual EU funds and subsidies budget and access to that. Here, it's partially against suspended because of these [ '27 ] milestones, partially suspended because of the fundamental rights chapter. That's another kind of 4 additional Hungarian legislations, which are affected here, again, it does seem to be in the intention and the interest of the new government to comply with these requirements. And here, the deadline is much longer. So [ '29]. So I think it's -- I don't see much risk here to be able to actually secure those funds. And then this -- there's a security action for Europe, safe loans. This is still early stage of development. I don't think any European country has started to actually use those funds. So that's obviously also they are dependent on the same milestones and requirements. But I think, again -- and there's no deadline, please, we are not aware of a deadline to use of those funds. This is for the defense development, right? So that can have a positive effect short term, right? If these funds open up and start to flow and generate a new investment cycle, basically. And it's not just these funds, but overall, investments can accelerate because I mean, these are just kind of triggers or contributing factors to a bigger investment scheme. And typically, what we have been seeing over the last 2 decades now that together with the EU funds, we typically have other funding facilities as well. So a higher EU fund flow to the country, translates to higher investments, higher GDP growth and higher, especially corporate loan demand. So this is what can be expected should all these events happen. Now based on this, we don't see a fundamental reason to change our guidance. So the guidance remain the same. Similar to last year, volume growth similar to last year margin. Cost-to-income ratio may be somewhat worse similar risk profile and maybe somewhat worse return on equity. Now based on the first quarter numbers, I think the -- we're pretty much on track in terms of loan growth, margin seems to be better. And maybe on this slide, there might be a positive surprise. Cost-to-income ratio, we'll see. I think it's too early to say that. And certainly, the risk profiles and to continue to project the same features as last year. So there's no reason to believe that this guidance would not be the right one and ROE in the first quarter somewhat better than we expected, but we'll see how it's going to develop over the year. So that was it. That was the formal part of the presentation. You have the usual additional slides in the pack, should you want to have more cross-section information about NII, about margins, about volume growth, fee income, other income and for risk cost. These are additional slides that we have in the package. So thank you for listening to this presentation. And please ask your questions.

[Operator Instructions] The first question is from Gabor Kemeny, Autonomous Research.

Thank you for your thoughts. Firstly, on cost. The 17% FX-adjusted cost growth, you talked about an element of the regulatory charges going up year-over-year and some expenses like the branch rationalization presumably, we drive savings down the road. But how do you expect cost growth to evolve from here? I guess there's a concern out there that while your revenues are developing more strongly than expected. A large part of that may not drop to the bottom line, given the cost inflation. Can you reassure here? That's the first topic. And then secondly, on the political developments in Hungary. What do you think is the likelihood that we may see a significant bank tax cut next year? And further on Hungary and since the election, we have seen a significant contraction in the sovereign spreads. Can you give us a sense of how this could impact your financials, your P&L capital from Q2? And the final thing here, has this increased your appetite to issue AT1 as well. I'll leave it there.

Yes. I mean, 17% cost growth is -- that's high. And our biggest increase we had in Russia, where we kind of invest into more even stronger compliance and and kind of regulatory control functions and also IT. And NII growth was actually 17%. So the problem in our case, the first quarter was that out of the revenue lines, the total income growth was FX-adjusted 12%. But the biggest chunk and the most important, NII grew 17%, fees, [indiscernible] grew. And the other income growth was also lower, and that's also kind of impacted by that. So I mean I can -- I mean, we are also aware of this and we carefully monitor and in a way, controlled costs. Having said that, we don't -- we still don't see a major reason to kind of start drastic cost control initiatives, right? I mean, let's say, as an example, Bulgaria, where I mean, obviously, Uzbekistan in particular is where we invest into the future and especially IT and people. So that's 34%. That's okay. And the -- if you take Russia out, then one of the highest in Bulgaria, but I mean, Bulgaria with this level of cost growth, achieved in the first quarter, 19%, 19% ROE, right? And that's Eurozone. So that's more than 2x return on equity over cost of equity. And volumes have been growing quite fast in Bulgaria last year. I mean, loan growth is 18%. And again, in the first -- just in 1 quarter, we had 5% numbers. So this -- we are growing fast organically, right, and that growth involves some, I mean, cost development as well. So I'm not going to tell you that we are going to reduce this over a kind of year-on-year cost growth to single digit or something like that because this is not -- it's not going to happen. But on the other hand, we are quite -- so this is not cost growth without any reins or just kind of being without control. All these developments are according to plan and under control, actually. And we are not actually concerned about these numbers. The only concern we have in terms of cost is basically Hungary and Hungarian headquarter costs, and this is where we have started to take measures, and we will continue to take measures in order to reduce the size of the -- on the HQ in Hungary and make it more efficient. Political development. Yes. I mean, I think this should be the expectation that I mean -- I don't think it's a realistic that the extra taxes will be cut this year in Hungary given the budget situation and the fiscal position what this new government inherited does not have any room to do that. I mean, again, 6.8% expect deficit this year. But if you believe, and we believe that this new government is actually committed to develop Hungary into a competitive modern economy quite more similar to kind of successful Western European economies. And that does not allow the level of sector taxes but just today and the level of distortion occurs and certainly, to support the mid- to long-term higher economy growth, which is expected in the country. So our expectation is that, yes, there will be a gradual decrease, especially in the extra profit tax in Hungary, which is by the windfall tax, which is -- the most painful number, right? And this is the number which was doubled from last year to this year, where the profitability of the banking sector overall actually declined. So this is completely unfunded and ridiculous that happen, nevertheless. So on this line, we definitely expect a material improvement. And in fact, over a course of -- hopefully, not too many years, the complete elimination of that line. Some level of bank tax and transaction tax, I'm sure, will remain. And it I think it would be at least fair to go back to the situation where we were in '21 and before where we only had banking tax and transaction times. The hub rate, we -- most of -- I mean our portfolio, our top government bond portfolio is in the old maturity [indiscernible] and the [indiscernible] HD portfolio. So there's no capital impact. You don't mark-to-market these bonds. So therefore, there's no immediate impact. In AT1, we know the situation regarding ATM or our view, AT1 has not changed. So we -- this we consider as a reserve for a potential larger acquisition. So we continue to be on the view that we only do AT1, if there's a larger acquisition, which requires that capital.

The next question is from Gulnara Saitkulova, Morgan Stanley.

Just a follow-up on the previous questions. Can you comment on your headcount strategy. You referred to a 1.5% increase in headcount, which areas of business are seeing this incremental hiring and what is driving that additional headcount demand? And another question on margin outlook. So you reiterated the NIM outlook of 4% with potential upside. Can you provide some color on your outlook for margins across your key markets? What trends are you currently seeing on the ground? And what are the main drivers we should be considering for this year and next across your geographies? And here, can you also mention what are you observing in terms of the competitive environment evolution across loans and deposits across your markets?

[indiscernible] question. Okay. So headcount, you mean headcount in Hungary or country by country or what?

Overall in the group.

We don't have an overall headcount policy for the group. I mean, the different entities in the group are at different stages of development in terms of market growth, in terms of expected growth in terms of IT maturity and in terms of progress of implementing new technical tools, I mean, AI tool. So there's -- we don't have a kind of overall headcount plan. We have buy -- I mean, we have, but that's an aggregation of the individual country numbers. And different countries are in different situations. Again, most, we have the most focused at the moment on Hungary, and we started to take measures and more specifically on the Hungarian headquarter headcount, which -- and I mean overall headcount in Hungary is 11,000 people in the whole group, which is -- I mean, it has grown a lot. Over the last couple of years. And here, we have especially again, regarding the headquarter, which is like more than 7,000 out of -- it's kind of 8,000 people if you take out the network, this is where we see, by the way, across the group, the biggest efficiency increase potential. And this is going to come over the next year, the next 1.5, 2 years. So we are not going to do any drastic measure where this is something where we focus, and there will be results. Net interest margin, again, I mean, this 4.29%, 4.6%. This seems to be clearly higher than the last year number, which was 4.34%. So already in the first quarter, we are considerably higher than last year. And therefore, I think maybe we can go to Page 27 here. which is about margins, yes. This is it. So there's, I think, a high risk here or a high potential for better performance than last year and better performance that we guided for. But just to be conservative, we decided not to change the guidance. Now if we look country by country, in Hungary, we have seen improvement, right? Over the last couple of years, and I think the bottom of the cycle was around 2.3%, something like that back in '23. Now we are almost 1 percentage point higher. And I mean, I mean improvement slows down, but there's still kind of especially driven by retail -- strong retail deposit growth that happened in the first quarter, this looks actually quite promising. And then we have the Eurozone countries, Bulgaria, Slovenia, Croatia, and I would include here Montenegro as well, which uses the euro, where we have seen margin compression, but recently, margins kind of stabilized, and this is what you can see. I mean Bulgaria, quarter-on-quarter, Slovenia, Croatia, and Montenegro reasonably stable levels, right? So there, we don't expect much change unless there's a rate hike and rate hike can happen. So the euro rate, again, most likely to be increased and that can be positive for these countries. And this was certainly not expected when we made the budget for this year. This is related to the war in Iran and the closure of the Strait and higher energy prices. So that can if indeed, it happens and the euro rate will be increased, then it will bolster up the margin in these countries. Serbia, some decline, and that's mostly due to our regulatory kind of changes, there are limits on the margins and the rates we can apply for retail lending in Serbia, and that is reflected in the margin. Uzbekistan started to improve, and that's a good news. I mean it's primarily because of the cost of funding kind of rational optimization and kind of deposit pricing optimization and basically, that's it. So these are the parts. We are already in the first quarter higher than what we guided for. And based on this, there's some chance that there's a fair chance if it will remain at this higher level.

Can I just follow up, which markets would you characterize as facing the greatest competitive pressure? And where do you see competitive dynamics remaining relatively benign?

I mean Bulgaria, Croatia, Slovenia quite price competitive. So it's basically the eurozone countries are the most price competitive, especially in lending, especially in corporate lending. And I don't think any of these markets are benign, unfortunately.

The next question is from Simon Nellis, Citigroup.

Thanks for the opportunity. I may not have catched everything in the presentation. My question is around fees, which were quite weak in, I mean, Russia, in particular, but also Hungary and Bulgaria. I think you probably touched on this, but what's the outlook for fees going forward? It seems the run rate has slowed quite significantly. I think there were a number of reasons behind this, but what's the outlook going forward from here? That would be my first question. And then also on risk costs, just wondering if -- what the exact changes to your FLI forward-looking macro assumptions were, if any, because of this U.S. around situation. And if you use any overlays to top off provisions without hitting the risk cost this quarter.

Fee income growth being modest year-on-year was driven by 2 countries: One, Russia, where they actually declined. And by the way, Russia also had a negative year-on-year contribution to other income. So it's basically transactional fees transfers and FX conversion margins, that's the next slide, Page 31. So it's not just the fee income. It's also -- if we can go to the next slide, please, 31, you can see there was quite a negative growth year-on-year in terms of other income as well, which is basically the FX conversion margin. So there's just less demand for these from our corporate clients. And this we observe in the numbers of other banks being active in those fields. I mean, namely the other European banks still active in Russia. So this seems to be systemic. And I don't think this is going to change dramatically over the course of the year. There might be some seasonality here. But I think it's -- our assumption is that these kind of special revenues to say, which are not so much related to our core activity, which is consumer lending and deposit taking maybe these kind of special revenues, they may be at a lower level this year than last year, considerably lower. And this is actually worse than what we planned for this year. But that's the case. And some of you might be happy to see that our revenue started to decrease in Russia. We have a more balanced view on this. We are not [indiscernible] happy about this. But anyway, this is what's happening. In terms of Hungarian fee income, yes, indeed, I said it at the beginning of the presentation that it's mostly because we were not able to increase the fees in line with inflation because we voluntarily had to, as all the other banks delay at the usual January fee adjustments. We are going to do this in the -- at the end of the first quarter. And that means that the second half of the year might be better. The other factor, which negatively impacted Hungary was that the -- this is -- it's fees and commissions, right? So and commissions is typically an expenditure and the higher mortgage lending involve higher commissions for third-party [indiscernible], and that's also accounted for in this line. So these are the the 2 countries where we had lower levels. In Russia, this is probably the new normal. In Hungary, it is not. So in Hungary, we should recover growth rate as we -- in the second half of the year on the fee income.

Yes. And I guess, Bulgaria, it seems that it's currency driven. So I guess, would you assume that the underlying fee growth should still be growing at around 6% in euro terms?

Bulgaria, we had 6% FX, I mean, you have to -- I mean, the [indiscernible] rate, especially to the euro rate change. So now from now on, we will have to be conscious of the FX impact, especially for Europe countries. So it's better to look at the FX-adjusted changes, right? So 6% is kind of okay.

Yes. And then just on the provisioning?

Provisioning, oh sorry, yes. We don't expect -- no, we didn't do extra provisions. We don't expect that -- I mean, whilst we -- in terms -- I mean, in line with what we expect in terms of the macro environment, and that is kind of slight increase, some increase in inflation and some decrease in potential GDP growth and maybe a higher rate environment. And these are the numbers that we -- I mean, these expectations are included in the numbers that we had on this chart in terms of the macro, that macro scenario does not warrant or require extra additional provisions, we seem to be quite conservatively provisioned already. So in a -- but whether this is optimistic or not, it's hard to tell, right? So there's a -- there's an extreme scenario where the Strait will be closed for the next, I don't know, 3 years and the oil prices will remain much higher than 100 for the next couple of years and so on and so on. In which case, a little bit much more serious kind of real economy adjustments and supply chain adjustments and demand adjustments across industries. And that is not factored in, in our current expectations. But again, we don't think that this is the expected scenario either.

The next question is from Máté Nemes, UBS.

Yes, thank you for the presentation. I have 3 questions, please. The first one would be on Uzbekistan. It's clear that you're seeing really good bottom line profit growth and also seeing good core revenue growth in the country. What struck out to me was quite muted loan growth on a sequential basis in the quarter. Maybe just surprising from a clear growth market. Seems like consumer was fine, corporate went backwards. Any color you can share on that? What do you see on the ground? What is the expectation? What we mean there. The second question would be on inorganic growth. Could you share any updates on M&A, I think at the time of the AGM or on the AGM, our Chairman mentioned that you're hopeful that you could announce an acquisition this year. Any color on that? Anything you can add? And also just in this context, tying back to your earlier comments on capital, what is the level of amount of excess capital that you're seeing at the moment? Just considering you want to be at the top end of the peer group in Tier 1 ratios. And last question would be just one on Hungary. You talked about sector taxes. And I was wondering, are there any sector-specific policy changes apart from taxation that you would like to see policy changes that will be beneficial in your view for the economy and the sector. Anything on that front would be appreciated.

Okay. So indeed, the volume growth in Uzbekistan was disappointing. I can confirm that. And it came from 2 angles. One was another kind of level of IT issues regarding the core system, the core system had serious operational issues and stopped working for meaningful amounts of time, it's quite seriously disrupted our ability to sell. Now those have been fixed. We in-sourced the development of this system, and we are buying the source code. So now we have -- we are getting full control over the development of the core system, and we are scaling up the development capacities. And the good news is that in April, there were no further mishaps in terms of availability of the core system. I mean this seems to be -- I mean this sounds like a very basic problem, but these are the problems that we faced. That was one. The other one is conservative. We still remain conservative, especially in corporate. So in corporate lending, we still -- we don't feel very confident to to be more aggressive or to be more active, right? We are exploring this, but we are careful and we don't want to make moves, which we regret in the future. There's no reason for that. Again, as you rightly pointed out, profitability improved. Earnings are getting to a level, which we -- where we want to see them. And we definitely want to keep that situation in the future, and we don't want to grow just for the sake of growth, right? We want to grow profitably. And in corporate, we are -- we still don't feel 100% confident that we can achieve the returns whether we expect after risk cost with strong volume changes. So this is the reason behind corporate kind of inactivity in a way. And the retail growth, the consumer lending growth, we wanted that to be stronger, but I was hindered by IT problems in the first quarter, which we sold. So there don't seem to be problems anymore in the second quarter. And in fact, we are putting live our -- are in operation, our new mobile app solution, we had a very, not more than one, and the new development is now going live, and we expect a very positive impact on retail activities as well coming for that. So yes, I mean, the first quarter somewhat difficult operationally again, but we are quite optimistic, and we believe that the rest of the year will be better in terms of growth. And I think we're actually quite happy to see that returns are closer to the levels that we expect them to be than were last year. There's no news I can share with you regarding M&A. We are obviously very restricted in terms of what we can just informally share. So whenever there will be a whenever there's an information important to share, we are sharing it immediately. We continue to look at various opportunities. And yes, I mean, it would be good to close -- to make an agreement this year where we are sure that we create value, but if we are not sure that we create value, then we are not going to make a deal, right? So this is -- given the strong organic growth trajectory, there's no pressure on us to to deliver deals. If we are not convinced that we create value for shareholders by doing those deals. So I know it's very general and doesn't really answer your question, and I'm sorry for that, but I'm not in a position to say any more. Year 1 capital, your question. So again, effectively, the ratio was higher than reported. So we have to talk about kind of 17.9 and 17.9 is certainly higher -- definitely higher than the highest on this slide. So -- and again, we restarted share buyback, and we just got an approval for another EUR 6 billion, and we continue buybacks. And this -- I mean, probably, I mean, some kind of 16.5%, something like that, I mean, between [ 16.5% and 17% ] in -- that's the range, I think, which would still allow us to be at the higher end of this group. So that's a potential kind of opportunity to do more buybacks or do an acquisition or more acquisitions, more on them. Yes. So that's the magnitude on the tier -- on that level. And then obviously, there's the alternative Tier 1 instrument, which is a dedicated reserve for us, issuing an A Tier 1. That's the other thing which we may consider. Other policy changes than sector taxes. I mean, if we could achieve a major improvement or material improvement on the sector taxes, we would already be quite happen. Other changes. I mean, if -- I mean, a pass, which leads to fulfilling the master criterias in 4 years, what the new government started to talk about means swift fiscal consolidation and decrease in inflation and actually quite swift convergence of the rate environment to the euro. In itself, that's a big change, right? And I would put the trajectory of a country in a very different path than what we had been for quite a long time in the last 10 years, I would say. Other than this, I don't know what policy change would -- yes, I mean, in that scenario, in a kind of lower budget deficit and lower rate environment scenario and plus availability of EU funds. That means that there will be much less need for these subsidized programs, right? If EU funds are available at coming and in the rate environment is lower then market-based lending and substantial demand at those rate levels, can be more than enough. So I think the necessity of this -- of the subsidized products in retail and corporate will diminish. That can be another kind of subsequent policy change, if that trajectory actually manifests.

The next question is from Gabor Bukta, Concorde Securities.

I have a couple of questions. Look, the first is regarding the -- for instance, activity. So you touch on this on Slide 11. And if you could clarify do you rate sensitivity because I'm not sure I got it. So does it mean that if rates drop by 100 basis points in Hungary. It is a net positive or negative for the bank? And does it include favor adjustments as well and if you move forward, I have a couple of questions related to Q2 because I think that you two will be distorted by a couple of things. First, the foreign has significantly strengthened following the elections and will be heavily impacted. So just wondering if you hedged part of your euro exposure. And the next one is that I think due to the share swap agreement with [indiscernible], you are eligible for a dividend of EUR 13 billion for [indiscernible]. But I guess more we'll postpone it to Q3. So could you clarify that you are expecting it in Q3 or will you book as a receivable in Q2 or what will happen. Yes, that's all.

Yes. The half rate sensitivity, I mean, the sensitivity is negative. So a lower rate means lower NII. So the sensitivity of what you can see on this slide means is that in the half rate was 100 bps lower than we are going to have set [indiscernible], EUR 24 billion less NII in 1 year -- in the following year.

Yes, FX [indiscernible], I didn't get that, is it relevant or consistent with the euro sensitivity because it was mentioned that for 100 basis points change in euro rates stood at around EUR 125 million. But yes, okay. It's clear.

These are kind of independent, right? So if ...

Yes, Okay. What about Q2?

Q2, yes, a stronger half. I mean the total earnings if the exchange rate appreciate that a stronger half translates into lower nominal half group level profits, right? And it's -- if -- but -- and then you have to have assumption on the other currencies as well, right? Because for instance, the [indiscernible] just strengthened towards the half. So there can be other movements and the Uzbek currency can strengthen as well. So there are different currency movements across the group. But if you assume a kind of can find appreciation in the half euro rate, right? And if you assume a parallel appreciation of the half to all the other currencies in the group, then the [indiscernible] rate appreciation translates roughly EUR 20 billion profit after tax per year. So I mean, if you divide it by a quarter, then it's EUR 5 billion, that's a quarterly impact by 10 for instance, there is more than 10 for it. So I mean you can do the math, and you can do whatever scenario you assume. Hedging, we don't have an open -- I mean we have a strategic open position. But when we don't -- other than that, we don't have a half position. So -- and we don't hedge the revenue from the non-Hungarian businesses. In fact, hedging is -- we hedge the capital ratio, the group level capital adequacy ratio. And that means that when the half appreciates or weakens, it changes the risk-weighted assets of the non-Hungarian businesses, right? and it also changes the equity of the non-Hungarian businesses. [indiscernible] want these 2 to move reasonably close to each other. And therefore, not we -- we want to have a situation where the exchange rate changes don't have a material impact on the group level capital adequacy. And that actually requires not to hedge the equities in the different group members. Having said that, I mean, quite majority of our investors are actually coming from other currencies than Hungarian for it, right, typically dollar, euro, British pounds. So they may look at the share price in their own currency as well. So I mean, I don't know. The dividends, it has an impact that all decided to pay the dividends later. It does have an impact on the cash flow on our liquidity plan, so to say, but it doesn't have an impact on the earnings. So we are going to accrue those expected dividends.

Talk about in Q2 or in Q3?

Q2. Decision was made.

[Operator Instructions] The next question is from Gabor Bukta again. I have another question related to others. I mean, the parent adjustment in Q1 was very significant. But given that the Hungarian government yields came down significantly in the last couple of weeks. Where do you see the fair value adjustment in Q2? If you take into account the current U.S. curve?

Indeed, the fare adjustment on subsidized loan is quite positive in the first quarter close to [ EUR 20 billion half ]. The is going to be the not the same amount. We don't know how much it's going to be. But the current situation means that it's going to be negative in the second quarter.

The next question is from attendee joined via phone. I open the line.

Sure. Jovan Sikimic from ODDO BHF. I have kind of a follow-up on Uzbekistan. If you look at the loans to deposits, they were basically flattish or stable over the last couple of quarters. Do you have any plans to let you normalize it back to, I don't know, 100, 150. And if you ask what would be approximately impact on the margins? And if it comes to the dividend, are you paying out the dividend from Uzbekistan unit? And if you maybe can share what's the current capital adequacy there? I don't think that you report it, but maybe you can share it with us. And the minor question for Serbia, I think you mentioned that you expect the kind of recovery, but we know that, I mean, politically, it was quite turbulent there. So I mean FDIs are kind of definitely negatively affected by this. So in which segments would you expect the recovery, especially in the lending activity there?

Dividends, we have not taken out so far. No, we haven't attempted it or haven't tried. Capital adequacy, [indiscernible] stack if you have this number here. I'm sure it's somewhere in the analyst tables where we are going to check and recovering -- I mean, recovery in terms of lending activity, I mean 1%. We had like 1% growth in the first quarter compared to that growth rate. I think there should be some -- I mean, we expect improvement for the rest of the year compared to the first quarter. Loan-to-deposit ratio target per se, we don't have and we are quite okay to operate over 100%. We have access to capital markets on a stand-alone basis. We issued a very successful bond last year, which was a double currency, bond local currency and dollar and there's further demand. So we feel comfortable to be able to fund on a stand-alone basis if there were higher growth loan demand and loan growth. So no, we don't feel constrained by funding, and we certainly don't have a loan-to-deposit ratio target per say.

And there is no pressure from the regulator, from the Central Bank, right? Because the sector is such in total has quite high loan to deposits, right?

No.

And on Serbia...

I mean banks -- I mean in normal environment, banks should have leverage. They should provide leverage in an economy. So there's nothing wrong with higher than 100% loan-to-deposit ratio. That used to be the norm in a way. We -- in Europe, we have developed into a situation where banks are expected to have lower than 100%. I mean, typically, it kind of became new norm that because there's so much liquidity in Europe and because banks have been so conservative in lending. But I don't think that's actually optimal for for the kind of long-term development of economies. So I don't see any problem having a bank having more than 100% loan-to-deposit ratio. In the meantime, I have the capital adequacy ratio number. It's 19%. 19 [indiscernible] one in [indiscernible]. The minimum requirement is 13. I mean, Serbia, we expect double-digit growth in retail and corporate lending. And we have seen -- on the market, I mean, I'm talking about market figures here because I mean, -- we haven't given guidance on the [indiscernible]. But yes, we expect acceleration in demand and yes.

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

Thank you. Thank you very much for joining us today, and thank you for listening to the presentation and for your very good questions. And please join us on the next con call, which will be on the fifth of August. So during the summer, we usually don't report on Friday because it's more polite to do it midweek. So it's going to be Wednesday in August, 5th of August. And please join us again. Until then, I wish you all the best, and goodbye.

Thank you for your participation. The conference is closed now. You may now disconnect. Goodbye.