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.