Otp Bank S/Adr R

This meeting is being recorded. Dear ladies and gentlemen, welcome to the OTP first quarter 2023 conference call. This conference will be recorded. As a reminder, during the presentation, all participants will be in a listen-only mode. After the presentation, there will be an opportunity to ask questions. May I now hand you over to Lasso Bencik, Chief Strategic and Financial Officer. Lasso, please go ahead.

Thank you. Good morning or good afternoon, depending where you are, and thank you for joining us today for this conf call. The presentation is available on the website, and during the conf call, I'm going through it, so you can also follow it online or in a printed copy if you have any. As usual, I will give a kind of short presentation. I promise it's going to be short and then a Q&A session follows. So maybe if you start on page two, I mean, the after-tax profit of the first quarter was a historic high. We have never ever had such a strong quarterly result. Obviously, this was a in a big way affected by one offs, but one offs which actually canceled each other out. So we accounted for in the first quarter for the usual bank tax, which was introduced in 2010, and the windfall tax, the recent one, according to the kind of origin and the logic just applied for last year. And that's another, that's 24 and 61 billion, so altogether 88 billion. But we also had a positive effect, and that's coming from the NKBM acquisition. There's a bed wheel acquisition. and then initial risk cost and the sum of these is basically this green line here 85 so it almost cancels out the financial taxes and the special taxes for the first quarter and then we had one more positive one off you might remember last year that was the default and the resolution of Sberbank Group, including Sberbank Hungary. We booked the loss last year, but that loss did not manifest, so we reversed that booking in the first quarter this year. So there's not much difference between the adjusted and the after-tax profit. Actually, the adjusted is somewhat lower. ROE terms, we do rather well, I mean, in kind of low 20s territory. which is arguably better than what we originally indicated, namely around last year level, which was 18.6. The first quarter has so far been better than our original expectations. Going forward, looking at the P&L, there are some Some factors which you have to keep in mind when you look at our data. First of all, we consolidated NKBM starting from February. So February, March includes NKBM, the Slovenian bank. Plus there has been quite strong movements in the exchange rates, the half euro rate and half ruble rate. So in order to get a kind of full picture, you probably have to look at this without NKBM, FX adjusted numbers, which is the column, the second column from the right. And as you can see, I mean, total income went up 3%, quarter and quarter. Costs were flat. and operating profit improved 5% in one quarter. And obviously the risk cost was the biggest mover of the results. It was much lower in the first quarter than in the fourth quarter last year. Pretty much the portfolio across the group has been stable, and even Russia, Ukraine, where we booked larger provisions last year, seem to be doing well in terms of portfolio quality, so there was really no need for further provisioning. On this slide, you can see the net interest margin, which is probably the most kind of interesting or worth looking at feature of our quarterly report. That will be a slide where we detail entity by entity, the NIEM developments, but overall the group level increased from 3.5 to 366. Cost to income ratio remained below 50. but slightly increased compared to the average of last year. Now, looking at the Hungarian performance, it's not as good for ROSE as the consolidated one. As you can see, adjusted profit went down. down year-on-year considerably. And this is purely due to, well, not purely because also cost increased and margin contracted. So this actually resulted in this squeeze of profits in Hungary. We had some improvement, but that's more like a kind of seasonal cost, year-end plus lower risk cost. ROE, not very high, but, I mean, this is somewhat distorted because here the balance sheet includes all the investments in the subsidiaries, and that has some implications for capital as well. But anyway, this is the calculated ROE. And here you can see the one-offs which manifested on the standalone or kind of core sub-consolidated level. One important factor here, the badwill doesn't appear at this level. The badwill only appears on the consolidated level. That's why actually without dividends received, the core business is negative, 37 billion negative in revenue. the first quarter because we booked the special taxes, but not the badwill here. Now, turning to the other countries, and first of all, I think very important, you see the NKBM contribution, 13 billion of equivalent for two months in terms of profit after tax. Bulgaria somewhat declined, but that's due to one factor, we had to book all the regulatory charges related to deposit protection in the first quarter in Bulgaria. um and also in skp and in croatia but for smaller amounts and that in bulgaria that resulted in a nine billion uh increase of uh of cost compared to the previous run rate so if we adjust with that then the profit was almost as much as in the fourth quarter last year And again, strong Slovenian performance, including the new acquisition. And this is obviously going to further increase in terms of its impact in the second quarter or three months of the given quarter that they accounted for. And Croatia, Serbia growing fast, Albania, Montenegro doing well. Also Moldova, surprisingly, given the situation there. And it's Ukraine and Russia. very strong and stable earnings. The operating environment in both countries kind of stabilized and therefore it allows this level of profitability and again portfolio qualities seem to be stable as well. Now, Romania is the only country here where we could not reach the required level of profitability and the required level of size, and there was even some decline quarter on quarter. I mean, if you look at the efficiency indicators, they obviously improved a lot, but that's due to the NIM expansion and more about that later on. So, if we turn the page, there's some further detail on Russia, Ukraine, as usual. Again, there's no major change in the situation in neither countries, but probably worse noting is the coverage level. So, even with this... strong 13 billion half-equivalent profit and more than 40% return on equity in the first quarter. We managed to increase coverage close to 15%. And this is provisions over total gross loans. So that's the kind of gross provision coverage, which is quite strong. In terms of the kind of liquidation impact on the ratios and the capital ratios, there's, again, not much difference between the last quarter, the fourth quarter last year. Russia contracted, so we have the increasing kind of retained earnings and an equity, which is a potential loss if we have to have to deconsolidate. And at the same time, kind of The other factor here is the exchange rate, which is important. The ruble started to weaken, and that actually reduced its number. So, in fact, the ruble rate has a potential impact on the overall level of exchange. ratios of capital ratios on a consolidated level so this is something to to watch because if the ruble weakens then it has a negative impact on our consolidated group level common equity tier one and this kind of negative impact in terms in case of the consolidation then reduces so there's a some dynamics here Ukraine, it increased to, decreased to five basis points of potential loss. Again, that's due to the earnings which were retained there. Now, the first quarter was characterized by the consolidation of MKBM, and in fact, the work started there. to merge the entity usually takes one and a half years for us to fully consolidate an entity and fully merge in case we have two entities in a country. So we can expect the merger to conclude somewhere third quarter next year. Now, if we go to the Uzbekistan story, this is the one coming. So after NKBM Slovenia, second quarter, we expect to close the Uzbekistan deal with the people take a bunker. I mean, we have talked about this before, and it has close to 8% overall market share, 30% market share in mortgage lending. It's the... fifth largest bank, state-owned bank, and then the first in the line of privatization. In terms of earning potential, as you can see, these are kind of latest published data they have. It's in the first half last year, 17 billion and a half equivalent. So that's the kind of run rate of profitability for six months period. So at least this much should be the contribution from for the second half of this year should the transaction close, which we expect to be so. Now, looking at the Ipoteca numbers, I think there's one kind of unique feature and that is the quite high loan to deposit ratio. It doesn't mean that we have to kind of refinance the entity with large third-party loans. It's basically the mortgage lending is to a large extent done by funding from various state organizations and at a preferential rate and that means that I mean, therefore the mortgages are somewhat in a subsidized level of interest. So it's kind of this kind of large interbank liabilities. That's the line where all these factors come in. Should we buy the entity, which we will, then there's only a small amount which we have to refinance less than $50 million equivalent. The price, we have not made public, but we alluded to the potential size of it in the updated guidance because we say that roughly 200 million euros one of positive can appear in the second quarter related to the transaction if it closes. That again is a combination of first day risk cost and mostly badwill. So you're buying the entity with a hefty badwill. At least that's the original data suggesting results. On page eight, as total income. And here you, I mean, if you follow, you're looking at the kind of quarter on quarter column, it can be somewhat confusing. So I try to explain the meaning of the different colors and numbers. So basically the gray ones are the ones which are related to the NKBM transaction. So total income line was impacted by 23 billion. income from NKBM February and March. So if you look at the kind of quarter and quarter change in total income, then the nominal change was six. Out of this, 23 was the impact of NKBM. Without NKBM, the nominal change would have been 17 minus. But if we also look with the FX rate, then you get the number, the second number in the last column on the right, it is 3%. So with that NKBM and FX adjusted overall income increased by 3%. So that's the kind of most meaningful number. And wherever we have two numbers, the second one is the FX adjusted. And the similar logic is followed in the following slides. So maybe some bits of a deep dive into net interest income. Again, there is a strong, if you go to, yeah, so again, NKBM contribution was 18 billion to net interest income. And in terms of movement, I mean, looking at the effects adjusted number quarter on quarter, there was quite some improvement in 17% up in Bulgaria, 18% up in Slovenia, excluding NKBM growth and Croatia 10, so kind of double-digit growth. in net interest income on a quarter to quarter level. Even Russia improved and even Ukraine improved somewhat. Now, the only exception is Hungary where we have kind of flattish net interest income dynamics. And the explanation comes on the following slide. You can see the net interest margins. Again, Hungary was flat or margin was flat. This is basically a combination of very little growth and the fact that we have this strong overweight of fixed growth. assets in the balance sheet and therefore the increase in the rate environment had a negative impact during the course of 2022 and there was not much trade change between the fourth quarter and the first quarter. We had some increase in corporate loan NII, and that provided a small improvement here in terms of three basis points, but it's rather flat. Unfortunately, the expectation here is that the second quarter might be worse or will be worse because the change, the compulsory reserves, the amount increased from 5% to 10%, but we have to put into reserves and the rate, I mean, changed in a way that for one quarter of it, they don't pay anything. So the effective rate on this 10% reserve requirement is 975, sorry, which compares to the 18% reference rate. So we are losing more than 8% on these reserves. And that new reserve requirement, came into force from April from the second quarter. So the second quarter will have a negative, probably be even lower in Hungary. And then starting from the third, fourth quarter, hopefully we will see a fast normalization of the rate environment and certainly for the second half of the year, we expect a rather rapid cut of the reference rate. And then hopefully this will induce improvement in the Hungarian name. From our perspective, we actually expect the first cut to happen in May because today the new inflation data came out and it's 24%. So finally it started to visibly decrease and hopefully the central bank will have will react to it by cutting the rates, starting the rate cutting exercise. In all the other countries, as you can see, net interest margin improved, and that's obviously due to the kind of Euro rates increasing, and the quasi-Euro countries like Bulgaria and Montenegro also applying that, and basically everywhere due to kind of repricing on higher benchmarks, we see improvement and that combination resulted in this slight increase in the overall consolidated name. Hungary was flat at this low level and all the other countries improved quite visibly. Now, volume dynamics loans, not surprisingly, long growth slowed down to close to zero. So altogether, we had like 1% growth in the portfolio. And that's in line with our previous guidance of not more than 5% growth overall, so 1% in one quarter. Especially mortgage lending is quite week uh with the exception of bulgaria um we don't there's actually not much growth and hungary started to decline in terms of mortgage volumes and it's the consumer landing which is kind of more um robust in a way especially hungary consumer lending is still growing albeit it's a lower much lower rate than last year but it's still growing In corporate volumes, there was some increase, namely in Hungary and in Bulgaria. This is related to one kind of larger deal which was booked in these two countries related to a leasing company in Slovenia, which we refinanced. Year-on-year changes, maybe not so significant, Interesting, so I'm moving to the deposit section. So maybe to page 13, yeah, one more. Yeah, so no change on kind of deposit levels and group level without the NKVM acquisition. Hungary was minus one, a corporate went down and retail was flat. In fact, this kind of retail being flat meant that our market share in retail deposits increased because overall in the market, retail deposits declined in Hungary. The corporate deposit volumes are very sensitive to pricing. So the fact that you see some Bigger plus and minus numbers means that we optimize the funding structure in each country, and we try to minimize the corporate deposits because by far they are the most expensive to take. So we just take as much as is really needed. In retail, it's kind of more flattish. In Croatia, we had some bigger decline in the first quarter. That's due to the fact that there was a kind of very attractive price. Retail sovereigns won. program done in the first quarter. Savings and also kind of a few private banking clients migrated to banks which provide smaller banks, which provide very high deposit rates. But again, this is far more than enough for Croatia and they are quite liquid. Plus, there was another impact that because the euro was introduced in January, first of January, and there was a lot of kind of deficit made to accounts of cash, and people then withdrew in the first quarter. So there's the other kind of technical impact here. We included one slide with further details on the deposits. in the share of insured, share of term. Now these numbers are actually quite stable. So we don't have a time series here, but really stable levels in terms of share of term deposits. And also the pricing level of overall deposits for instance, Hungary quarter on quarter, it was flat. So there was no increase for the increase in overall deposit, cost of deposits. Going further to net fee income, again, this kind of complicated structure in a way that you get the numbers without NKBM by not looking at the gray numbers and then the real fundamental change can be captured in the kind of second number in the last one. Here the biggest kind of factor was the kind of bonus payments to the fund management company in Hungary. they overperformed the market last year and therefore in the fourth quarter they receive the bonus that's included here in them russia and then somewhat but that's more kind of seasonal there other income There's some crossplay here between Hungary and Bulgaria, this kind of intergroup placements and transactions between the entities. They had some kind of, especially on the Bulgarian side, some explain some of the changes. And in Hungary, we had FX gains and derivative gains. So that's kind of trading result doing better in the first quarter. Of course, this is a difficult factor. I mean, we see kind of two, three bigger numbers here. Hungary, 25% year on year. cost growth that's quite strong and it's led by personal expenses, but also other costs were strong. And this is kind of related to wage inflation, slight increase in the headcount and a strong increase in real estate costs and other kind of service costs. in hungary i mean hunger just to remind you in hungary we have today today inflation number was 34 but the peak 26 so hunger is by far the highest inflation environment uh in the countries where we operate um bulgaria 55 again this is just a technical item it's coming from this increased solution to uh to uh positive protection And Albania, we are still, I mean, the merger actually happened, the legal merge, and that had some extra costs. So here we are kind of continuing to merge the two entities. And unlike in other processes, we first did a legal merge and the operational merge will follow. So this kind of increase will disappear as we realize cost synergies. In terms of capital adequacy and liquidity, our capital ratios went down due to the NKBM transactions, so that's quite visible here. And we expect another 30 basis point impact from the Ipoteka transaction, which should happen in the second quarter. But of course, in the meantime, we expect to generate earnings. So hopefully part of it will be compensated by earnings, retained earnings in the second quarter. We do quarterly reviews, audit reviews, so you always kind of incorporate the quarterly results in the consolidated capital ratio. Liquidity remains robust. I mean, SDR ratio close to 200%. Estable funding ratio close to 140%. We sit on 12 billion liquid assets in Euro terms. If we go to the next one, I mean, this is the usual kind of portfolio quality. Stage three ratio continued to decline. And again, there's not much to talk about here because portfolio quality is, again, quite robust, even in countries like Russia and Ukraine. So there's not much to report here. Just a bit more color on the Hungarian situation. As you can see, mortgage lending kind of tanked. So this is applications went down by almost 80% year on year compared to the first quarter last year, which was a very strong quarter by the way in terms of base. since that was the time for the green housing loans. But nevertheless, this is the picture. So mortgage lending is very low level in Hungary, whereas consumer lending is still okay. So some growth, as you can see, 2% growth on the basis on the consumer loan side in terms of cash flow and volumes. And then overall retail savings, our market share somewhat declined, but more importantly in retail deposits, so actual deposits, our market share increases. And our volumes were flat, so it means that overall in the market there's actually a negative trend of retail deposits. People due to the high inflation are living up their savings and reducing their savings. And that's one factor. The other factor is that they migrate their savings to bonds, to typically sovereign bonds. And we have somewhat lower market share in that segment. In terms of the subsidized retail structure, the baby loan is getting less and less. I mean, it's basically the eligible client base is running out. This green loan program, as you can see, this is last year. It was very strong in the first quarter. There's still some going on, but we... in terms of issuance, but the program closed more or less at the beginning of the second half last year. Our market share was usually very high, 42%, much higher than our usual market share in mortgages. And then corporate slowed down as well. I mean, we had a very strong year last year, 32% overall growth. And they slowed down, started to slow down considerably for the last year and actually slowed down to 3% in the first quarter. And again, this was characterized by one big deal mostly. So it's not a It may be much less to go for the remaining part of the year. There are two subsidized structures, the state chain card and the borrower's grabber loan program. And in both, we are quite active and serve our clients. There's the usual ESG kind of program. information, our rating, improving sustainable analytics, there was some improvement in terms of the riskiness, ESG riskiness, and this is something we strategically focus on and keep as a very important factor of our efforts. Now, in terms of the macro, Hungary has the lowest expected growth, even lower than Russia and Ukraine this year. And that's due to the very high inflation and the very high rate environment, which results in substantial drop in consumption. in new investments. So there's a strong break on the Hungarian economy as they try to kind of moderate inflation to a more palatable level. We expect this effort to be successful and we expect inflation to go below 10%. by year end. And obviously this kind of reduction will accelerate in the second half when the base increases last year. I mean, inflation really started to pick up a year ago in April, May, and then skyrocketed during the summer up to 26% year end last year. So compared to that base we expect on this 9.3% further inflation. And the rate environment as well, we expect to kind of drop below 10% by year end, from which we would benefit in a meaningful way. Our sensitivity to the half rate is $15.5 billion. NII per one percentage point. And this is true until kind of 30% level from which there's kind of less than that, only 6 billion per one percentage point. Hungarian situation, and then all the other countries showed somewhat higher growth potential and much lower inflation levels for this year. So, something we should keep looking at, but in all these countries, we see a kind of stable environment, operating environment, so we don't see increasing risk or concentrations of risk. And again, even Montenegro is, Moldova is doing okay. Sorry, we had quite a big drop in the GDP. And again, Ukraine, huge drop last year and some improvement this year. And as you could see, we have positive earnings in these functions. Now, finally, the kind of uh for the color on the um section go through there will be a one of kind of around 200 million uh euro um that will impact and uh And then the next point here is the net interest margin. As I indicated, the Hungarian, the core net interest margin might not improve the second quarter. Rather, it should be less, as we expect. to decline in the second quarter and then from that level if the rate cuts manifest we should see an improvement but the second quarter in hungary will not be better than the first we do see do expect some improvement in the other countries but nevertheless it may not be enough to compensate for the whole group level So the group level name will be potentially impacted here as well. Now that's the good news, the calculation of the windfall tax change. And it's more, it's closer now to a windfall tax. So an extra profit tax is now for the second half of this. So for the first six months is calculated the same method as it was done last year but for the second next six months for the second half of the year the calculation methodology changed and it's basically uh pre-tax earnings uh adjusted with uh dividends received and the extra taxes and the percentage of that is the new tax which in our calculator in our case results in 28 billion less tax So we are going to book this adjustment in the second quarter. So that will be a plus 28 billion pre-tax number in the second quarter. The other kind of risk profile, cost efficiency, volume growth, we keep the kind of previous guidance, so kind of stable credit profile, risk profile, pressure on cost efficiency. and cost income ratio, and performing loan growth not more than 5%. And the ROE around last year. Here we, I think, should note that the first quarter was much better than last year. Last year, on average, we had 18.6%. 2-ish, 22-23%, so the first quarter performed somewhat better, and there might be some potential here to even achieve more than last year. So that's the kind of short summary of the situation, and I'm sure you have some questions, so please ask them.

Thank you, ladies and gentlemen, we will now begin our question and answer session. If you have a question for our speaker, please click on the raised hand icon to indicate or press star nine on your phone's dial pad. One moment, please, for the first question. The first question is from Gabor Kemeny, Autonomous Research.

Yes. Hi. Thank you for all the insights. I'd like to pick up on your last point when you noted that there could be some upsides to the ROE guidance. Can you talk a bit about this further? Where could that upside potentially come from? Risk costs. Sorry? Risk costs. Risk costs. Okay. Okay, that is... Indeed, what we saw in Q1. Yeah, my other question would be, can you, let's say this is a broader one actually, where would you see the earnings share, the contribution of the Hungarian business relative to the foreign business going forward in a normalized rate, normalized inflation environment if we don't assume more acquisitions beyond hypotheca? So maybe next year.

I mean, in the first quarter, it was 30%, which is the volume share of the Hungarian business from loans, for instance. So their share of adjusted earnings of the Hungarian entity was kind of 30%. I mean, look, Hungarian margins should improve in a lower rate environment if rates normalize. And then the subsidiary rates, I mean, okay, it's a question of how fast. I mean, next year, I don't know whether the euro rate, what the euro rate is going to do. Maybe there will not be so much normalization there or reduction. So until we have this kind of current level of rate environment in kind of the Euro or Euro-related countries. And Hungary, we see a fast decline in the rate and therefore a need to improve somewhat. That suggested the Hungarian share could increase during the course of this year, the second half of this year. And next year, again if they have hungarian margin increase improves then it can provide a boost but in terms of kind of underlying business so if you exclude the margin uh from the equation and just look at the fundamentals, volumes, and sales, and so on, then I don't see any leverage in Hungary. I mean, if you look at the macro data, it's going to be kind of challenging on the budget as well, and and the inflation, which is coming down from a very, very high level. So given the somewhat more challenging macro perspectives in Hungary, it's not the underlying businesses can actually grow bigger and faster outside Hungary than in Hungary, especially if you consider Ipoteka. I mean, in Uzbekistan, there's a huge growth potential there.

Okay, that's fair. Thank you.

Thank you. The next question is from an attendee joined via phone. I opened the line. You'll be able to see an automatic message about it. Please press star six to unmute. May I ask the name and the company, please?

Hello. Hello. Good morning, everyone. This is Roberto Drozda from PQOBP Securities. I have a question regarding the outlook for the NII in Hungary. Basically, you found more cautious this quarter. A quarter ago, you said you expected the NII to improve compared to the 4Q22. Also, you alluded to the changed expectations regarding the interest rate outlook in Hungary, where during the call you discussed the lower income from the reserve requirement. So basically, my question is, what's the major reason behind the change in this stance? And the additional one is, is there a need at OTP core to adjust upwards the pricing for deposits, given what you said on the smaller competitors attracting depositors away, as I understood, from the bank? Thank you.

so that was that comment was related to croatia so um regarding deposits so in hungary and also in croatia we decided not to increase the deposit rates and in hungary we also have not actually the average overall level of deposit cost or average interest on deposits all in somewhat declined due to combination effect. So no, that doesn't seem to be a need here. Now, if you look at, I mean, factually the quarterly name improved from the fourth quarter, but that improvement was not as strong. It was only three basis points, right? And then in the second quarter, we are going to see two new factors. One, the reserve requirements reducing NII, the change in the reserve requirement. And hopefully the rate cuts can start as early as this month. If the rate cuts start, then this can be kind of positive. But overall, we expect the the change in the reserve requirements outweigh the kind of short term impact of the rate cuts. So overall, I mean, second quarter might be the kind of bottoming out. And then from there, we expect improvements. So that should, again, if the rate goes down to the level where we expect, I mean, close to 10% or below 10% by year end. So these are the most important factors here. It's not the pricing of deposits. It's the reserve requirement change and exactly when the rate cuts start to happen. And we expected that somewhat earlier in our previous kind of expectations when we talked about the name development potentially in Hungary. But I mean, again, quarter on quarter, there was some improvement, but not much.

Right. If I may continue on the outlook regarding the cost of waste, do you think there is this potential for provisioning charges to improve potentially. It's coming more from decreased NPL formation across the board, or there are better opportunities for ridebacks and NPL sales? What is the driving force behind it? Thank you.

It's stable quality.

Okay. Thank you very much. Thank you.

Thank you. The next question is, again, from an attendee joined via phone. I open the line. You will receive an automatic message about it. Please press star six to unmute. May I ask the name and the company, please?

Hello. This is from Bank of America, and thank you very much for taking my questions. I have several. One is about your sensitivity to lower benchmark rates. You mentioned 15 billion, sorry, 1.5 billion and 0.6 billion to falling rates, to different changes in the policy rates. Could you please confirm this is valid for falling rates? And are we talking about sensitivity to bull bar or to sensitivity to deposit rates? This is my first question.

The sensitivity is 15 billion per one percentage point, and it's related to the kind of benchmark rate, which is 18% the overnight deposit rate.

Right. Okay. So it's deposit rate. Perfect. And you mentioned that at some point it falls from 15 to 6. At what level does it fall to that?

When it goes over 13, right? So when the kind of reference rate catches up with the base rate.

Perfect. That's clear. Thank you for that. My second question is about your cost of risk, which was a very positive surprise for us in the first quarter numbers. And you mentioned that the answer quality outlook is stable. How shall we think about the cost of risk outlook going forward from the first quarter level?

Well, again, we don't see portfolio deterioration. So it can stay at the lower level, but it's a big portfolio and there's a lot going on macro wise in this country. So I cannot exclude a scenario where it starts to increase from the level we had in the first quarter. Nevertheless, I think it should not be higher than last year levels overall. But so far there are no visible signs of this deterioration.

Right. Thank you. My third question is about your Hungarian interest rate caps. Could you please update us on any conversations about potential extension of interest rate caps?

I'm not aware of any discussions here. Other than us trying to argue for no further. There are some kind of messages sent through the media, so bankers complaining, and then the ministry people kind of arguing back, but so far there's no clear indication of where this is, my good.

Right. Excellent. Thank you. And I have last question, and this one is less technical, more big picture, holistic question. So historically, LTP was good in M&A and grew very well organically. Now, organic domestic growth is negative in real terms, and the latest M&A was actually outside of CE. Could you share with us, what's your strategy for the next, not year, but maybe years? Where do you want to grow going forward?

We have a strong preference for growing in countries where we are present. So I think that that's by far a kind of strategic priority. And then, opportunistically, we keep our eyes open for other jurisdictions, but first of all, we would like to grow in the countries where we are present.

Leszlo, thank you very much for your answers. Thank you.

Thank you.

Thank you. The next question is Mr. Magesh Vajtokata.

Thank you for the opportunity. I just want to understand, you know, Magyar Bank Holding is expected to be live in May of this year. So from your, does that change any of your assessment of the competitive dynamics of the Hungarian market in terms of loans, deposits, market shares and the pricing of your deposits? How are you looking at the Magyar Bank Holding Corporation and what is your evaluation of this? Thank you.

Yeah, well, in general, we welcome consolidation in the market that creates better competitive dynamics. So, and it's actually, we consider it from our perspective, better that kind of new entity was created as opposed to one of our foreign competitors buying up what is Essence.

Just a follow-up to that, but another entity that could compete with you on market share, could they start writing larger corporate loans? Would they be able to attract deposits at more favorable rates? Is there any chance you see this could affect the competitive dynamics of the market? That's my last question. Thank you.

Usually less players mean kind of better competitive conditions, not worse.

Thank you.

Like we are typically more conservative in every pricing instance than our competitors. So, I mean, we are always typically more expensive than competitors. And we can do that because we are bigger than the rest. And if there's another big entity, they can potentially also have this pricing power more. And that should, in our view, ease competition, not increase. But we'll see.

That's very helpful. Thank you. Thank you.

Thank you. The next question is from Veronica Lurka, Morgan Stanley.

Hi, this is Veronica from Morgan Stanley. I have two questions. So the first question regarding the loan growth outlook in Hungary. So how do you see the outlook for loan growth and could there be any positive surprise?

I don't think this year will bring positive surprises in loan growth. Hopefully by Kind of next year, we're going to see single-digit rate numbers, and then we can expect, again, a revival of lending activity.

Great. Thank you. And the second question is regarding your acquisition in Uzbekistan. So could you provide us with some more color about your expectations for Uzbekistan and the key drivers that make this acquisition attractive for you?

I mean, it's a large country, 36 million people and growing fast, quite young population, under-penetrated and underserved in terms of banking services and growing fast. I mean, GDP growth is expected to be around 5% in this overall kind of environment. So we expect a kind of very fast growth of the banking markets in Uzbekistan, and we would like to kind of take our share from that and benefit from being the first in the line of privatization of state-owned banks. So that's the underlying rationale. Again, the last published data was for the first half last year, and there they made roughly kind of 50-ish million dollars dollar in six months in the kind of ROE of 22, 23%. So at least this much should come from them as a first kind of contribution for a six-month contribution this year.

Brilliant. Just to kind of understand like what the competitive environment is in Uzbekistan at the moment and where you see the most potential to improve Ipoteca operations?

Well, I mean, in terms of digitalization, there are actually quite good infrastructural services. And there's one kind of online player, Click, and there's TBC Bank present with a kind of primary online service. value proposition, mobile proposition. So these are the kind of two strong retail digital players. And then it's the, Ipoteca is the number five bank, and the first four are also state-owned, they are much bigger in corporate lending and they are financing state-owned corporates. So that's a different kind of segment strength than what Ipoteco has. And clearly our objective is not to be strong in corporate lending to state-owned companies. We want to focus on the retail. And Ipoteca has 30% market share in mortgages. So that's potentially a big area where we see market opportunity given the very fast urbanization and kind of fast, I mean, large programs to build new housing for the growing population. So I'd say the focus should be retail and mortgages and transactional services. Okay, great.

Thank you.

Thank you. The next question is from . I open the line. You will receive an automatic message . May I ask the name and the company, please?

I would have many questions already answered, but I would have two, three, five. If you can maybe talk a bit on deposit pricing among countries like Germany and Croatia, but how is it going in Bulgaria and other countries like Serbia? So what kind of, compared to the previous quote, is there any type of pickup there?

It's Romania where we see kind of strong deposit competition in terms of pricing. The other countries, not so much.

Okay. And you mentioned Romania. I mean, it would be a good question. I mean, you also mentioned the scale there, so we all know this. But what kind of your strategy is kind of going there? I mean, there is no M&A in the next three to five years, so would you still consider kind of a country or whatsoever there?

I mean, this is a difficult question. Good question. And so far only limited results. We have a strong operation there. We invested a lot during the last couple of years. It's not robust and strong, but it's a very competitive market. So I think we have to kind of carefully consider what we do here. It's a very attractive and it's very attractive for everyone in Romania. So it's not an easy situation for us in there. We try to figure out new ways to solve this situation.

Okay, thanks. And one last, if I may. I have not any kind of explicit wording on Russia-Ukraine, but I hope that given, let's say, kind of robust results, Q1, that the wording is similar to the last one, so expecting kind of better profit compared to last year, right?

That's quite strong. In both countries. The only problem is that the equity is locked there. We cannot take out dividends from Ukraine, and we have to figure out how to take out dividends from Russia. So that's the only problem. The earnings are locked there.

Okay. Thank you very much, Laszlo. Thank you.

Thank you. The next question is from Simon. Oh, hi.

Thanks for the opportunity. Yeah, first question is just on the integration that you're going to see integrating NKM and SKB. If you could elaborate on that and what kind of synergy you'd expect and how long that whole process would take, that would be my first question. Second, on Russia, we've heard that Raff Eisen is looking to potentially spin off the Russian business by the end of this year. you know, do you see any opportunity to also exit? And then last, if you could just comment, sorry if I missed this during the presentation, on potential extensions of some of the regulatory measures, like I think the windfall compact is lower for an additional year, the same for rate caps in the second half of the year.

Thanks. So what was the first one?

The integration costs and energy.

Yeah, yeah, yeah. I mean, usually, I mean, it takes 18 months usually, and usually target maybe 30, 40% of the smaller entity as a potential cost synergy. I mean, there's some kind of use consultants, obviously, and some additional IT costs usually involved. but it's not large, so it's not, I mean, the savings are much bigger. Russia, I mean, we continue to explore strategic opportunities, but there's a kind of, they were ban on selling these assets. So it's not, it's actually very difficult to do so. Nevertheless, we continue to look at various options, but the underlying scenario is that we continue and the business is doing okay. We are a tiny player in Russia, focusing on security to lending, consumer lending. We are not very far from being systemic and hope this is kind of acceptable for every party. because I mean, selling the asset seems to be quite difficult. Measures in Hungary, I mean, we don't know. I mean, there is, I think that there's some reason to be potentially concerned that there might be extended. I think, I mean, the question is what are the conditions? So certainly the rate cap, my hunch would be that it is going to be extended, but at a higher level than today. And the tax, that's a longer story, because it's for next year. I mean, there's a kind of backtrack accord with the previous tax, which was introduced for three years, and then still stays with us. That's where I think that...

Thank you.

It's all for me. Thank you. The next question is from an attendee joined by... Please press star six to end. May I ask the name and the company, please?

Hello. Good afternoon. This is Juliana Gold from Goldman Sachs. Thank you for the presentation. Two questions, please. I was wondering on your MRL strategy going forward. I appreciate the clear guidance you have given us on... issuance plans for this year, but would there be any plans to issue a senior non-preferred deal at any point in time beyond 2023? And the second question is on the Slovenian subsidiary. So it will have an independent MRL requirement, so just to confirm, you will apply a multiple point of entry resolution strategy there? Thank you.

Yes, at least for this year and next year, the NKBM entity is going to be separate from the rest of the group as an MP subgroup. It's still a question mark what the treatment of the entity after the merger will be, but most of it will stay outside as well as a have multiple point of entry subgroup within the point of entry group. Now in terms of, I mean, for this year, we indicated that it's senior preferred, and then it seems that we can kind of fulfill the subordination criteria requirements by doing those. So, no plan, no visible plan for non-preferred.

Okay. Very clear. Thank you.

Thank you. Thank you. The next question is from .

Good afternoon. Thanks very much for the presentation. I have two, three main questions, please. One, on deposit betas in Hungary specifically, it seems the retail segment is repricing a lot slower than the corporate segment, which, of course, does make sense. But are there any reasons specific to Hungary that are keeping retail betas at these low levels, you think? And how do you see repricing evolve from here? And you mentioned earlier in the comments, Laszlo, that deposits aren't really what will cause the margins to go down from here. But Could you see a scenario where this becomes a pressure point later in the year? And second question, if I may, this is on cost of risk in Ukraine, which declined quite visibly this quarter. And in fact, it was the lowest since the start of the war. But still, there was some visible increase in stage three loans at the same time. So how should we think about provisioning and asset quality dynamics in Ukraine specifically in the remainder of the year? Thank you.

Deposit pricing, retail deposit pricing remains very low. And overall, deposit pricing did not change from quarter to quarter. And the reasons for that, probably, I mean, there's a lot of liquidity, so each bank is quite liquid. And there are these levies and windfall taxes, so everyone has to pay high taxes in order to kind of earn earn enough to pay them there's a kind of strong incentive to make profits and we don't have new players so each bank which operates in the market has a quite robust kind of own portfolio And these portfolios will immediately reprice should they start to kind of increase the rates much more than competition. So I think everyone understands that we can only lose – I don't know, but, I mean, it seems that – everyone is aware of the dice someone started a deposit price war but obviously we don't know whether this is going to happen or not i mean this this is obviously up to each player individually what they do um yeah braininess equality yeah there was a um Again, the portfolio is quite okay. And then we, in general, we also have higher coverage on stage two. So the stage three migration, I mean, to be frank, I don't know exactly what happened, but just checking. But overall, we don't, again, Ukrainian asset policy seems pretty robust and pretty stable, which is actually quite, in a way, surprising. I think the really interesting part is that we had increasing coverage with low provisioning, and there what happened was that we Actually, the portfolio overall declines.

Thank you. Very clear. If I may just follow up on this. Is it reasonable to expect that these levels of cost of risk will remain for the foreseeable future? I mean, given we were close to 3% this quarter, but the average last year was obviously significantly higher.

Yeah, I got the figure. So, yeah, Ukraine went up from 1815 to 2258, right? Yeah. True. Now, here, it's also that the overall portfolio keeps declining, and it declines fast. So, I mean, even if there's no nominal, part of this is explained by that, that it's just the denominator getting smaller and smaller. Okay. Makes sense. Whether it can be characteristical for the whole year, I mean, at least for the second quarter, it seems to be characteristical.

All right. Very clear. Thanks very much.

Thank you.

Thank you. If you have a question for our speaker, please click on the raise hand icon to indicate or press star nine on your phone's dial for web As there are no further questions, I hand back to the speaker.

Okay. Thank you very much. Thank you for joining us today. And thank you for your very good questions. And let's come back when we discuss the second quarter results. Until then, I wish you all the best. Goodbye.

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