Otp Bank S/Adr R

Dear ladies and gentlemen, welcome to the OTP Bank second 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 Laszlo Bencik, Chief Strategic and Financial Officer. Laszlo, please go ahead.

Thank you. Thank you for joining us today. Good morning and good afternoon, depending where you are on this kind of midsummer occasion. As usual, we have the presentation available here and also on the website. And I'm going through the pages in a rather swift manner, and then we will have a Q&A session. So starting on page two, the quarterly results and half-year results for this year. Obviously, it's an all-time record and by a huge margin. And this extraordinary performance was kind of supported partially by one-offs, as you can see. So in the second quarter, 23, we had almost 100 billion adjustments, one of items. And during the course of the first six months, these were more than 100 billion half. So we still keep, have the special tax of financial institutions in the normal tax. And there is another interest rate cap extension as negatives, but these negatives were by far counterbalanced or superseded by positives related to the two acquisitions that we have concluded during the first six months. First in February, NKPM in Slovenia, and then in June, Hypotheka Banka in Uzbekistan. Both of these banks acquisitions entailed and therefore the kind of starting when we included them in our consolidated reports, there's a subsequent positive one-off effect. And that is in a huge contrast with last year, first six months, where actually we had more than 200 billion half negative items related to the direct effects of the war, of the Russian Ukraine, war and also to the negative measures. I mean, from our perspective, at least of the Hungarian government. So all in all, this big movement in the adjustments resulted partially in this large year on year and for an improvement. But if you look at the adjusted profit after tax, it's also a record high number. boosted by someone else, which I'm going to talk about later on, but mostly driven by low risk costs. I mean, portfolio quality in general is stable and good, and macro expectations keep improving. Therefore, IFRS 9 provisioning is less, or even in some cases, we can release provisions due to better macro expectations. I think a notable number on this slide is the ROE, adjusted ROE, 28.4%, which is much higher than last year. And therefore, we, as you will see at the end of the presentation, we kind of modified our original expectations for this year where we and expected similar ROE, adjusted ROE to last year. Now it's quite likely that this number is going to be bigger for the course of the year. Slight increase in net interest margin on the group level year on year, and some improvement from the cost to income ratio. If you look at the balance sheet, sorry, the P&L lies in more detail. And again, there's quite some noise here because of the two acquisitions, which happened in the first and second quarters this year. And therefore, it's worth looking at when we look at the differences between the time periods to look at the VDAT acquisition rates, growth rates, and also we have seen some strong movements in Fx rates, so therefore we usually look at the Fx adjusted without acquisition numbers so operating profit year on year for six months up 30% strong income dynamics and somewhat still I mean strong but less than income growth increase in expenses, we are in a high inflation environment, especially in Hungary. In the core business, Hungarian inflation peaked at 26%. So this is really high inflation environment where cost growth is also strong, not just income growth. But all in all, we managed to increase operating profit 30% with our acquisitions. And on this slide, you can see the risk cost number. It was pretty much zero for the first six months of this year. which is in stark contrast with the minus 105 billion we provisioned last year when the war started and we had the expectation that there will be direct and indirect and negative ramifications regarding the portfolio quality of the war. But those negative expectations have not manifested. Portfolio quality is quite stable. It is quite stable also in Russia and Ukraine. which are primarily affected by the war and also quite stable across the group. Going forward, talking about Hungary and the core performance. Here, this quarterly improvement, but if you look at the first six months of this year and compare it to Last year, there's still a decline, more than a 30% decline. And this is primarily coming from the net interest margin being less. And I will kind of elaborate more on this and the drivers behind the declining net interest margin. Cost to income also worsened. And this is partially due to the tighter revenue margins, but also cost to assets slightly increased due to the high inflation environment, exceptionally high inflation environment in Hungary. Adjustments-wise, and one-off items-wise, last year, first six months was heavily impacted by the kind of war-related losses and write-offs. And And the negative is much smaller number this year, but still negative coming from the windfall tax and the special bank tax and the interest rate cap extension. When we look at the other group members, it's a pretty positive picture in almost every, well, in every case, we improve the profit after tax compared last year. ROE numbers are quite respectable levels. And even in Ukraine, Russia, especially if you look at Ukraine, we have the highest ROE in the entire group coming from Ukraine and countries like Moldova where you would not expect such a good performance was churning at more than 30% ROE first half of this year. You can also note in this page the increase in Slovenia. Last year for six months, it was 10 billion. This year is 54. And that's because we included the contribution from NKBM starting from February. Uzbekistan, the latest acquisition, Ipoteka Bank, P&L-wise, it's not yet included, but we consolidated the balance sheet as of in the second quarter numbers. So the P&L contribution we don't see yet coming from Ipoteka Banka. This is going to appear starting from the third quarter this year. Now, I like to point out here a very significant development in the group and taking a kind of birds-eye view and a more kind of strategic look at what happened during the last couple of years regarding OTP as a whole. And as you can see, we have gone through tremendous growth trajectory. I mean, since 2016, we have almost tripled the size of the group and now it's very close to 100 billion Euro total balance sheet. And part of that was obviously organic growth, but there was a large contribution from the acquisitions that we have made. The flags here represent the year of the acquisition when we acquired the new bank in a given country. Now, this resulted in a very significant increase a strong shift in the composition of the group, whereas Hungary used to be 60-70% of the group profit and in many other metrics like total loan portfolio and such. Today, actually the profit contribution is around 30% and the foreign operations now outweigh the Hungarian one, especially so the Eurozone countries or the quasi Eurozone countries like Bulgaria, which is about to introduce the Euro, their size increased such that they represent today 40% of the total loan book of the group. So that's a fundamental kind of growth. in overall size, but also internally there has been a shift in the composition of the group. Hungary, contribution of Hungary shrunk and the rest grew, especially the Eurozone countries. A few thoughts about the new market in our group or the new country in our group is Pakistan. It's a 36 million inhabitants, people, country growing very fast. So it's a very positive demographics country with median age being 30 years. So it's a young and fast growing population, relatively low GDP per capita, but growing rapidly. High level of education and schooling system, so well-trained workforce and kind of leadership strongly committed to market reforms and improving the well-being of the country and the people in the country. So this is a country, in our view, on a very, very positive trajectory where there's a lot of room to grow from a low base and the very clear intention by the leadership of the country to develop in general and also in particular regarding the banking sector. So if you look at the bank what we acquired, it's the number five bank on the market and it's the smallest of the four or five large state-owned banks with 7.7% market share. And this bank was the first in the expected series of bank privatizations. So we were the first buyer of a state-owned bank. And the size, if you look at by total assets or loan book, It's certainly not, it doesn't look like a game changer for the whole group. Kind of 4% share within the total, but in terms of growth potential and in terms of profit potential, believe that actually it's going to have a much bigger role and share in our future story than just a pure loan book or total asset size of the of the operation.

Few words about Russia, Ukraine.