Otp Bank S/Adr R

Ladies and gentlemen, welcome to the first nine months 2024 conference call of OTP Bank. Please note that 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 László Bencsik, Chief Financial and Strategic Officer. László, you may begin.

Thank you. Good morning or good afternoon, depending where you are. Thank you for joining us on OTP Group's 2024 Third Quarter Interim Results Conference Core Presentation. As usual, the presentation is available on the website and we are also showing it while I talk. So you can download it from the website if that's more convenient for you. And as usual, I'm going through the presentation, most pages, and then we can have a very exciting Q&A session as usual. So starting on the highlights page, page number two, there hasn't been much change to this slide. I mean, we continue. to be dominant in the region. Our profitability, if anything, improved from the first six months to the first nine months, and it's close to 25% now. And compared to last year, it is somewhat lower, but we are at a much lower leverage. In fact, as you can see on this slide, our capital adequacy ratio went up above 19%. And our leverage ratio is closer to 11%. Just to remind you, the European kind of minimum requirement is 5%. And most of the banks are between five and six and a half. So this kind of shows the amount of capital we are running on and kind of relatively little leverage we have. And despite all of this, we have this quite strong ROE. Liquidity remains strong and portfolio quality stable. And it has been so for, frankly, last eight years, despite all the events and turbulences in the economy and in the environment. Page three summarizes the most important financials. So the third quarter was 319 billion and the first nine months was 826 billion. Now, this is slightly lower than the bottom line reported number a year before, but you may well remember that last year we had two large one-off positive items due to the two acquisitions we made in the beginning of the year in Slovenia and somewhere around the middle of the year in Uzbekistan, and both of these acquisitions These acquisitions were below book, so we booked bedwells, and those contributed positively to results. Now these type of contributions they don't appear this year. Therefore, it makes sense to kind of adjust last year with that. So if you make that adjustment to last year figures, then we end up 19% year-on-year growth, which is, I think, quite remarkable. Again, return on equity close to 25. Net interest margins stabilized close to 4.3%. And it has been served for most of the time of this year. And this is markedly higher than in the base period last year. Most of the difference is coming from improvement in Hungary. I'm going to talk about the Hungarian NIM development later on. Cost of income ratio, very nice to see that it's going lower and lower. And we are getting close to 40%. And risk-cost rate. somewhat tiny bit lower than last year. In this quarter, in the third quarter, there were two kind of important milestone events. One was that we completed in July the sale of our Romanian bank, which we had for 20 years, we acquired this bank in 2004. and closed the sale of this asset just in July. Unfortunately, this was one of the countries, Romania, which despite all of our efforts, we were unable to organically grow from a small bank existence to a mid-large bank existence. And the environment, to put it mildly, has not been very supportive for us to acquire more assets. So eventually we had to do the conclusion, strategic conclusion and sell the bank. Now the impact, the positive impact on capital adequacy appeared in this quarter when we closed the transactions. So that was 53 basis points. on common equity tier one. And there was one remaining element from the financial, from the P&L impact to come through, that's 10.5 billion plus in other income. So these two are the most visible results of the sale, other than obviously assets and liabilities went down accordingly with our assets and liabilities, which we used to have in Romania. Now the other milestone event was that we finalized, we closed the merger in Slovenia at the end of August. And now we have one operation, one IT environment. It went very, very smoothly on time, on budget, under the very sharp eyes of ECB. This was our supervision. This was our first merger out of the I think probably a dozen which has been done with ECB being the supervisor and it has created additional work and effort, but ultimately probably contributed to the excellent execution of the merger. How many other developments? I'm sure there will be questions. So we wanted to preempt the questions and formally say that currently there's no information about significant transactions to be announced publicly, which is not a big statement, because if there were, we would have announced them. But nevertheless, I think that's what we can say, that there's not much to say at this moment. But we keep looking. We will continue to look into every aspect opportunity which has a potential to create value for shareholders in the future, as we have done in the past. The kind of 30-70% split of earnings remained in the first nine months. That seems to be the new norm in the group, that Hungary is around 30% and foreign operations 70%. If anything, this will probably continue to change in a way that the foreign contribution might further grow. Page four, you can see the P&L development. This year, not because of the acquisition, but because of selling the Romanian business. In fact, we need to adjust to make some adjustments in the P&L and also in the balance sheet lines in order to have the full picture. As usual, these gray columns with gray headings show you the year-on-year FX adjusted and organic. So without acquisitions and without divestitures, period-to-period changes. So year-on-year first nine months, total income went up 16%, cost 13%, and that resulted in 18% operating profit improvement. In fact, risk costs were higher this year than last year in the first nine months. That's mostly due to the extra provisions we booked for the Russian bonds. And therefore together we have 14% adjusted profit growth year on year. Now, I think the problem most important number on this slide is the very top 25% net interest income growth. I will elaborate more on this, where this growth has come from. Again, this is organic and FX adjusted. Next page shows the key highlights about the Hungarian, the core performance. It's up compared to last year by 29%, because here, again, there's one item which does not appear in the consolidated numbers group level, only at the kind of standalone Hungarian core level. It's a technical item related to the Slovenia merger. I mean, due to actually complicated technicalities, when we did the merger, We merged our originally broad bank, SKB, into the newly broad bank last year, NKBM. And during this merge, we had to mark to market the value of our original bank, the previously acquired bank. And therefore, the increase of its kind of fair value resulted in this one-off But again, this disappears in consolidation and it is clearly not something which is related to normal business activities. So we have to look at the numbers without this item and all the ratios here, what you see have been calculated without this 113 billion. And there was another kind of material, one of, it's actually not one of, it's each quarter we have some result coming from this baby loan and subsidized mortgage loan fair value adjustment as the shape of the yield curve changes from quarter to quarter. And this is a it's quite a big portfolio. So it's 1.5 trillion half. So it's actually in this quarter, we booked 16 billion for fair value adjustment on this portfolio due to the changes in the shape of the yield curve. But this is just like 1%. fair value change given the overall size of the portfolio as such. So it's actually a meaningful material number to consider when we look at the quarterly Hungarian profit, which is 97 billion. However, compared to the total size of the portfolio, it is understandable that it's changing the volatility 1% per quarter. And we continue to increase impairment on Russian bonds. So there was 5 billion accounted for in the third quarter. Neem, net interest margin improved. And I think that was a major game changer, which actually happened at the end of last year. So we already started the year with this 2.8. around 2.8% net interest margin in the first quarter. And since then, it has continued and actually somewhat improved on a quarterly basis or continued to improve on a quarterly basis. But this is clearly a different ballpark. And this is the most important driver behind the group net interest margins. development. There's no new news on the special taxes and windfall tax and transaction tax since the last conf call we had. We haven't got new information on these items either for this year or for next year. A bit more detail on the Hungarian business activity development. And this, on the retail side, it actually looks very, very positive. As you can see, new production of mortgages increased 2.4 times compared to last year. In our case, 2.2 times higher than for the whole market. And this is, I mean, this is quite sizable and it shows that after the quite big drop last year, retail real estate market recovered this year and demand is actually quite strong and continues to be strong. The same is true for for cash loans and consumer loans. In these volumes, there was no decline last year. So decline last year, we also had growth. And despite of this kind of increasing base, there was so far this year 61% increase in new contractual voyage, in our case, and somewhat less on the market. So that shows that consumers are strong and RITA loan demand remains strong in Hungary, despite the rather, I would say, weakish overall GDP performance, which is unfortunately more reflected in the corporate loan dynamics, which is described on slide seven. As you can see, there's some growth, 4% growth in micro small, but only 1% growth so far in loans to Hungarian corporates, which kind of reflects a very low level of demand and not much new investment, not much new developments and projects starting in the country, at least not new developments which finance themselves from the local banking market, because in fact, FDI remains strong in their big developments and especially in the car industry, electric car industry and traditional car industry continue, but obviously they don't finance them from the local banking sector. Now, even this with this low growth levels, we managed to turn around the last year negative trend of decline in corporate market share. So we again started to see some improvement in our corporate loan market share in Hungary, which is always a very positive news. Page eight, you can see the kind of highlights of profitability and cost to income ratios and overall profit contribution of the foreign subsidiaries. And this is also a very positive picture, I believe. In most of the cases, we see nominal increases in profit contribution and the ROEs remain strong. Quite remarkable improvement in case of Serbia, above 20% ROE in a kind of declining rate environment. And we are very happy that Ipoteka Bank performed so well. That's our new acquisition, which we made last year. This was the first privatization process in the banking sector. And we acquired the fifth largest bank from the state. And despite a huge ongoing transformation effort and work done in the bank to modernize it as fast as possible, despite most of the focus being on that, we managed to book 42 billion half contribution in the first nine months in ROE. was above 34%. So it's, we are quite happy to see this that in this early stage after the acquisition, we are already making substantial meaningful contribution to group profitability and the returns are as good as you can see. The other good thing is that the smaller banks, I mean, in obviously smaller countries, these are actually sizable banks or actually big banks, but in small countries like Montenegro, Albania and Moldova, they also perform around 20 or higher percent ROE, which is definitely positive. Ukraine continues to be a strong contributor to overall profits. And this is, I think, quite important and remarkable, given the divorce situation in the country. So maybe a few more detail about in a cross-section manner about the different P&R lines and net interest income. As I said, this is probably the most kind of important or eye catching number in the whole presentation that year on year we managed to organically increase that interest income 25%. And as you can see, most of this growth nominally, and also in terms of growth rate came from Hungary. And that's just because of the margin recovery and the margin improvement primarily And secondarily, also due to the fact that starting from the fourth quarter last year, retail deposits started to grow. If you may remember that between the second quarter end of second quarter 22 and the end of second quarter 23, retail deposits a decline in general in Hungary on the market, and specifically in our cases, less than on the market. So our market should increase, but nevertheless, there was a around 10% decline And that was very painful in terms of our profitability. And it has been without precedent. We have never seen that before. I mean, this was obviously due to the high inflation, which peaked at 22%, 25%, sorry, and due to high rate environment, which was for quite a while at 18% and the very high yield retail government bonds, which created it. unbeatable competition for us. But now, this year especially, we have seen already 5% growth in retail deposits, which continued in the quarter. So that actually contributes to also meaningfully other than the overall changes in the rate environment to the improvement of NII. in Hungary. In the Euro, I mean, Slovenia and Croatia are in the Eurozone, Bulgaria is in ERM2, quasi-Eurozone, so Eurozone rate environment, and Montenegro adopted the Euro. So we have four countries which technically you can consider them Eurozone. I think it's quite good that even in these countries, despite the declining rate environment and therefore pressure on margins, we managed to continue to grow NII in these countries between 16 and 23%. I mean, that was due to primarily strong volume dynamics. Net interest margin, page 10. I mean, this is just another way to look at the same events in a way. So as you can see, net interest margin continued to increase on a quarterly basis in Hungary, somewhat compared to the second quarter. And now this is primarily because of retail deposit dynamics that in the second quarter, we had a strong retail deposit growth and that on an average, kind of quarter and quarter average 3% increase in volumes. And that's more or less what you can see here in this margin improvement. And as I mentioned in the Euro, Euro linked countries, we experienced margin pressure or margin contraction quarter on quarter and mostly also year on year. Next slide, further details, the margin change and the drivers of margin changes in the three quarters each this year. there wasn't much overall change in the margin from the second to the third quarter on the group level. But as you can see, basically margin increase in Hungary and that increase was counterbalanced by some contraction in Slovenia and in Bulgaria. By the way, Slovenia is probably the most competitive in terms of deposit and also loan pricing at the moment across the group. So that's a difficult market from a price competition point of view. On page 12, we start to talk about volume dynamics, quarter on quarter loan growth, maybe two numbers important. One is Hungarian mortgage growth, which continues to be strong. So just in one quarter, 3% growth. Consumer was actually quite strong as well, 4% continued. And I think what important is that you will see that the year-to-date numbers as well that this year, after two rather slow years, we started kind of restarted lending in Ukraine. So we are more kind of less conservative and more eager to start to grow our loan book in Ukraine. So based on retail and corporate, we became active in lending and albeit from a low base, we started to grow volumes. And this is like just in one quarter, we had 10% growth. If we look at the year-to-date developments, I mean, there's pretty much the same kind of highlights. First of all, it's worth looking at the total number. It's 7% in the first growth. Again, here you can see on the left, leftist common column, two numbers. The number in the top left is the kind of reported number change and the one in the right bottom is the one which is adjusted with the sale of the Romanian bank. So as if it was not in the group at the beginning of the year. So that's the kind of organic real year to date performance. And it's also FX adjusted as related to performing loans. So altogether 7%. Last year, all year we grew 6%. I think it's safe to say now that we indeed we seem to be growing faster this year than last year already in the first nine months. We grew more than last year in the whole year. And you can see here that Ukraine went up 21% in nine months in terms of loan volumes and Hungarian mortgages 9% in nine months. So most likely we will be visibly above 10% growth, so double digit mortgage growth in Hungary. And that is obviously not surprising if we think back to one of the previous slides where I mentioned that we actually contracted this year 2.4 times more mortgages than last year. Deposit growth. I mean, we are not so much focusing on deposit collection in general, given that our loan to deposit ratio on the group level is 73%. So we are quite liquid. So we really focus on deposit collection where we make a lot of money on deposits or where it's really profitable and where the loan to deposit ratios are high or exceedingly high, much higher than 100%. And maybe it's better to look at the next page, which shows the year-to-date change, so overall 5%, which means that actually in nominal volume terms, the deposit growth this year has so far been higher than loan growth, despite the ratio of loan growth being 7%. So again, you can see here this 5% year-to-date growth in Hungarian retail. That is a very, very important number from the perspective of our profitability in Hungary and overall, even for the whole group. The other, I think, outlying number here is Ipoteka in Uzbekistan. I think you may remember that when we brought the bank, last year, the loan-to-deposit ratio was above 300%. Actually, a year ago, and at the end of the third quarter last year, it was almost exactly 300%. Now, due to this strong deposit growth, what we have seen so far this year, this ratio is closer now to 200%. So, in fact, it was exactly 206%. So we almost improve 100% of the loan to deposit ratio of our bank in Uzbekistan, which obviously this is important and strategic from our perspective and makes the bank much more sustainable structure. Page 16, some detail, again, for a section view on net fee income overall divestiture and acquisition adjusted year-on-year growth 14% and quite strong number in Hungary and Hungary again high inflation environment high transaction volume growth but unfortunately as you can see the third quarter was negative in terms of fee growth in Hungary. And this reflects the newly introduced transaction tax says in Hungary or not newly introduced, but increased transaction taxes. In Hungary, the rate of the tax increase for for transfers and for cash withdrawals by 50%, basically, from point three to point 45% and point from 0.6 to 0.9%. So and in during till the end of the year, we are not allowed to pass this on to retail clients only to corporate. So it is kind of retail transaction tax increase, which we have not been able to pass on through our fees to clients reflects, I mean, or resulted in this decline in Hungary. Other than that, it's mostly, I mean, we see strong results on a quarterly basis in Bulgaria, Croatia, Albania. Those are typically the countries where tourism is strong and tourism related transactional revenues increase. And fund management in Hungary, year on year, 40% increased. I mean, assets under management has grown a lot, and they are close to 4.5 trillion off. And with this, we have almost one third of the market. Our market share is 32% of assets under management in Hungary. So that's quite a strong performance and this kind of generates stable fee incomes. Other income. This is the line where the Hungarian subsidized baby loan and mortgage loan fair value adjustments appear. So there's a lot of noise these years on this line, and we try to explain here how much of this kind of year-on-year and quarterly changes are related to this in Hungary. So clearly, nominally, this is the line which makes most impact on the other income, and unfortunately, it will continue to create noise in this P&R line, given the nature of the accounting treatment of these volumes. Operating costs on page 18. Overall, 13% adjusted FX and acquisition and divestiture adjusted growth. 8% in Hungary, 7% personal. And actually in Hungary, we have a high level of depreciation. And that is the reflection of the investments of the COPEX investments we have made during the last couple of years into modernizing our RIT. And this is just a reflection of that. DSK, I mean, very high levels of wage inflation, which is, in a very good, from a perspective of long-growth. I mean, you probably saw the kind of retail long-growth numbers, which are one of the high, pretty much the highest in the group. So yesterday in Bulgaria, mortgages grew 21%, consumer volume 17% just in nine months. And that's partially due to the fact that wage inflation is strong, consumer is strong, disposable income, real disposable income increases. But the driver of that is wage inflation. So unfortunately, this is a country where, well, I don't know, unfortunate or not, because as I said, there's a positive side of this on the loan demand side. and the loan quality side, but certainly from a cost perspective, it's a challenge to keep or rein in, in a way, our actually personal expenses growth in Bulgaria. In Slovenia, this seemingly large increase year on year is due to the fact that we... we are not showing anymore, starting from this year, the cost of merger, post-acquisition merger as one of items. We show them as kind of business as usual cost. And this year was very heavy in Slovenia in terms of the merger activities and the associated costs. So that's This kind of high year-on-year growth is attributable to that and also to wage increases. And now that the merger was done, we will focus on realizing synergies. We already started to combine branches. And during the course of the next one, one and a half years, we intend to to realize the targeted cost synergies, which are in the range of 30, 35 million Euro annually in terms of cost savings. And in Albania, you can already see the results of the merger, what we completed there at the end of last year. So there's some of the cost synergies already manifested and as the direct result of that, nominal costs actually decreased year on year in Albania. Risk costs on page 19. Again, overall portfolio quality rather stable. And we increased somewhat provisioning on this Russian bond exposures in Hungary and in Bulgaria. And the coverage is now up to 62% overall. There hasn't been any change in the status of these bonds. So the still current bonds continue to pay coupons And those coupons arrive to Hungary into OTP's bank account in Mercantil Bank and obviously keep it in a closed account. We don't touch it until further. We actually need a jury decision on this in order to release them in the future. But that's another story. The most important thing is that these Interest payments are here in Hungary in our accounts, albeit on a closed account. If you look at the overall portfolio quality metrics on page 20, state three ratio continued to decline, so it reached 4% in the third quarter. and we continue to maintain a relatively conservative level of coverage. You can see that compared to our competitors, we have overall a higher coverage, both on performing stage one and two and non-performing stage three exposures. Capital adequacy improved quite considerably due to the continuous profit accumulation, but also to this one-off event, as I mentioned at the beginning of the presentation, 53 basis point increase is attributable to the sale, the closure of the transaction in Romania. As you can see on this picture, basically profit accumulation resulted in 2.9 percentage point increase in the, in the common equity to do our ratio during the first nine months. And you can see the other effects one by one on this slide. Liquidity and bonds and maturities and all dates wise we had a actually a an eventful period in the in the third quarter we called back two bonds as you can see on this page in july a senior preferred and the tier two all together 900 million and we issued two bonds since the end of the second quarter one was a yuan bond uh the other smaller amount, 300 million and the other one in October, actually. So after the third quarter, but before the reporting day today, we did 500 million Euro senior preferred. I mean, last year will be compared to this overall size, more than a hundred billion Euro balance sheet the call profile next year or the call dates. Altogether, less than a billion callable papers. So it's quite modest compared to the size of the overall operation. And even if you compare it to the profit that we generate in a year, this is a rather small amount. And accordingly, our liquidity ratios, as you can see in the lower left corner, remain to be quite strong in themselves and in comparison to our regional competitors. A little bit about the future. We are not yet at the stage where we make guidance for next year. I will try to resist your questions and not elaborate too much on that. We are in the process of finalizing or creating the plan, the budget for next year. It has not finished yet. So as usual, we will talk about 25 guidance when we present the annual results after 24 in early March. But I think it's fair to say that our overall expectation regarding the operating environment is quite positive. So as you can see, in almost every country where we are present, we expect GDP growth to accelerate or at least remain stable. So, gradual improvement in the external environment, it's more remarkable in Hungary, or mostly remarkable in Hungary, I would say, the improvement expectation. Unfortunately, the recent GDP numbers were somewhat discouraging and they were a negative surprise in a way. So, the annual growth at the end of the three the third quarter was actually negative. And we kind of, by year end, it will probably improve due to base effect, but it will probably not be higher than 1%, which is certainly lower than our original expectations. For next year, the government guidance and expectation is 3.4%. they actually like to say that it's going to be between three and six, but the point expectation, what they have is 3.4%. And we are slightly more conservative on this, but even if this 2.5, 2.8% manifests that next year, this is definitely going to be a better environment for us. And the most obvious direct impact on our operations should be the increase in corporate loan demand. Because as you have seen from our numbers, corporate loan growth was very, very low this year. And retail actually quite decent. And if this macro environment manifests next year, then I think it's fair to expect that retail will continue to grow at least with the current dynamics, if not more. And hopefully, corporate demand will also catch up to retail demand and we should see close to 10 or even higher percent corporate loan growth. But this is That's probably the biggest question mark in our heads as well regarding next year. The other countries are more or less on a more predictable track, I would say. The implication of this year's guidance is that we are not changing the guidance now. We made one change after the second quarter result, and that was on the line of the net interest margin. Originally we suggested maybe similar level to last year, but then we upgraded that guidance. And now given, I'm seeing the third quarter numbers, I think that was the right thing to do. It's clear that we're gonna have higher margin this year than last year. We haven't made a formal, adjustment to these numbers. But if we look at the other lines, given that we had 7% growth in the first nine months, I think it's fair to assume now that our original guidance was right, that it's very likely that we will end up having more than 6% overall the whole year. Cost to income ratio first nine months, was 41%. I mean, there's usually a seasonality in costs. Costs are typically somewhat higher in the fourth quarter. So it might happen that we end up higher than 41%. But this is, I think, still around 45%. The good thing that it's around from below and not from above. So in that sense, I think we have have done a good job. Risk profile, again, portfolio remains stable. So that seemed to manifest at least in the first nine months of the year, our original guidance. And ROE, yes, it's lower than last year. And I think now it's clear for you as well that this decline is due to increasing leverage and not because of lower earnings. So that was the presentation, what we prepared. and what I wanted to share with you. And I'm sure you have very good and exciting 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 raise hand icon or press star nine on your phone's dial pad. The first question is from Gábor Kemény, Autonomous Research.