Otp Bank S/Adr R

Welcome to the fourth quarter 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 Laszlo Bencik, Chief Financial and Strategic Officer. Laszlo, you may begin.

Thank you. Good morning or good afternoon, depending where you are. And thank you for joining us today on OTP Bank's 2024 Annual Results Presentation. We are going to follow the usual format, so you have the presentation available on the website, which you can download, or alternatively, we are also showing it parallel to the conf call. And I'm going to do a hopefully short presentation and then you will have a chance to ask your valuable questions. So let's start on page two. The highlights. have not changed so much. We updated them. So dominant position in Central East in Europe, leading position in five countries or kind of second position and four times four-fold increase during the last 10 years through organic growth and Altogether, 14 acquisitions, actually 13 bank acquisitions and one portfolio purchase during the last 10 years. And this resulted in a portfolio which is 44% Eurozone. plus ERM2, which is Bulgaria. By the way, the good news about Bulgaria, that there seem to be now an academic commitment from both sides, it seems, to introduce the euro from the 1st of January. So this is our strong assumption now that it's going to happen and we are preparing heavily for that event and 76% within the EU. So a pretty well diversified and I think from a risk return perspective optimal group set up. Profitability continued to be strong. a kind of minor decrease year on year, if you adjust the 23 numbers. But nevertheless, I think there has been a much bigger adjustment in the cost of capital given the expected return, given the normalization of the rate environments across The group, very strong liquidity position, very stable and strong capital position, as you can see from these numbers. And portfolio quality continued to improve. So stage three ratio, year-on-year decline by 70 basis points to 3.6%. And we remain committed to ESG goals. On page three, You can see some more details regarding our financial performance. So the total profit exceeded 1.5 trillion, so it's 1.76 billion. And if we adjust 2023 with the clearly one-off impact of the two acquisitions we made, which had positive contribution and the planned sale of the Romanian bank, which had a negative contribution in 2023, And then compared to that basis, the year-on-year improvement was 19%. And that resulted in this 23.5% return on equity, which is slightly less than the adjusted 24.9% in 2023. But that's mostly because our leverage decreased. I think we are one of the least levered banks in Europe. Leverage ratio is well above 10%. And obviously, this is also reflected by or in the very high capital adequacy ratio. So, I mean, this decline in return on equity is attributable mostly to the denominator, the increase in equity and the decrease in leverage. Net interest margin improves. That was kind of one of the biggest improvements during 24. And this is, you will see later in the presentation that this is almost exclusively due to the improvement in the Hungarian, the core Hungarian net interest margin. On top of the margin improvement, we also had long growth of 9%. And these together contributed to roughly 17% increase in revenues and total cost growth is 11%. So operating ratios improved and the cost of income ratio therefore actually decreased to 41.3, which is in a way a record low in our kind of recent or not even so recent history. Risk-cost rates were pretty much similar to the 23 level, the same ballpark. And as I said, the state-free ratio actually decreased, went down to 3.6%. Now, these good numbers, again, Hungary, last year, there's kind of increasing contribution coming from the improved margin. But overall, the structure of the group is such that most of the profit is coming from outside the country. So almost 70% was attributable to outside Hungary operations in this year. Next page, you can see page four, the kind of P&L lines. And again, in 23, we acquired two banks, but one was in January, so that doesn't disturb so much the numbers. But the apothecary acquisition was actually at the end of the first half. Plus, in 24, August, we sold one of the one of our businesses, namely Romania. Therefore, there's some noise in these unadjusted numbers. If you adjust them, if you take out Uzbekistan from 23 and 24, so two years, and Romania from 23 and 24, then you actually have this year-on-year organic, so to say, FX-adjusted growth rates and that is slightly less revenue growth 15 compared to 17 which is the unadjusted growth And profit after that tax growth was only 10% in this. If we look at the numbers from this perspective, as opposed to almost 20% when we take into consideration this Pakistan acquisition, Ipoteka Bank, and also the sale of our business in Romania. if you look at on a quarterly basis on our numbers which were not so much affected by acquisitions or divestitures then kind of good 5% growth in terms of revenues and I think the cost growth was as seasonally as usually high but maybe not as high seasonally that it used to be And therefore, the cost to income ratio in the fourth quarter went up only to 42%. And in the previous quarter, third quarter, it was only 38%. So that shows that, I mean, the kind of level of improvement in our efficiency ratios due to the last couple of years from organic and inorganic growth rates. A few words about Hungary specifically and our core operations there on page five. Again, I think the most notable improvement here is in the net interest margin. Went up kind of yearly average from 2.3 to 2.9%. That's a huge improvement. The two important factors here. One is that the rate environment went back to the range for which we kind of optimized the balance sheet, so to say, or the asset liability position. You may remember that beginning of 23, first half, the rate environment in Hungary was about 18%. And a few years ago, maybe four years ago, it was more like 30, 50 basis points. So it almost increased. But now we are back to the 6.5%, which is well within our kind of within the range for which we optimized the balance sheet impact. So this is a convenient rate environment in a sense for us. And therefore, the net interest margin kind of went back to the levels where it used to be before this extreme rate hike. The other kind of very unique and actually very negative development was between mid 22 to mid 23. You might remember in that period, retail deposits actually declined in Hungary, which was unheard of. It has been unheard of for the last 35 years in Hungary. And in just one year on the market, there was more than 10% decline. Our market share went up, but nevertheless, our volumes went down as well. And that was obviously very negative for a name in Hungary. But that's Also recovered, so starting from the second half of 23 and actually 24, we saw a quite healthy Hungarian retail deposit growth. So that factor as well kind of recovered and contributed to improved margins in Hungary. Unfortunately, these special levies and policy costs, so to say, in Hungary, uh remained quite elevated and they even were kind of worse news is that which we already talked about that that this year we are going to pay even more than last year these numbers we were informed i mean the transaction tax was increased the tax rates were increased last summer 24 summer in the and the The windfall tax was also extended last year into this year. So unfortunately, we have to increase our contributions, extra contributions to the budget this year. There was this kind of other one-off, this 112 billion half, which only appeared in Hungary. This is really an accounting kind of number. When we finalized the merger, when we concluded the merger in Slovenia, we had to mark-to-market increase the book value of the investment of the previous, the first acquisition, SKB Bank in Slovenia. Slovenia and that increase in the value the valuation of that asset created a one-off result which only appeared in the Hungarian book so that was obviously during the consolidation it cancels out so this is something you have to correct I think the Hungarian numbers in order to have a clear picture. Two more important of items to understand the Hungarian profitability development were the fair value adjustments on the subsidized products in Hungary and the impairment on the Russian bonds which we have in the Hungarian books. We have not implemented corrections. So this adjustment or adjustments, so the adjustments, adjusted number, this 270, doesn't include these two items, the 23 plus and the minus 34, but nevertheless, these were kind of meaningfully material numbers. And this mark-to-market kind of value adjustment, fair value adjustment on the subsidized loans. In 24, it was 23 billion plus, which was actually a much lower number, as you can see, than what we did in 23. And again, in 23, it did not appear as a as an adjustment either. But the kind of uplift coming from this fair value adjustment was much less in 24 than in 23. And plus, we had this negative item due to the encouragement of our supervisor in Hungary, which we agreed with because we always like to be more conservative on provisioning than less conservative. We increased provisions for the Russian bonds and the impact of that was 34 billion of negative loans a year. A few words about the segments performance in Hungary. Retail did very well, especially retail lending was strong. So mortgages, contractual amounts more than doubled compared to 23. I mean, obviously, 2003 was a rather kind of low number, but nevertheless, the recovery was faster and potentially stronger than we originally expected. And the other good news was that despite actually quite high basis in 2003, there was a further 65% growth in the contractual amounts of cash loans and this is a quite profitable product and the good news is that we managed to increase our market share in this cash loan segment close to 50 percent which is i think a very formidable achievement and in the meantime we continued to increase our market share in retail deposits and again in hungary that's the other quite profitable product retail deposits because the rates in the United States are actually quite low on this. Corporate. I mean, this was one of the issues back in 23 that there was not much corporate loan demand. and loan volumes actually declined in 23. Now 24, and especially the last quarter, as you will see in the detailed volume dynamics pages, started to increase. So it seems that we have a trend changing, a point of turnaround in the overall trend of this segment. The total Hungarian numbers did not increase last year because we had one loan which we paid back, where the client actually paid back, which was not to Hungarian clients. It was a Slovenian one, a quite large exposure, which was paid back. But if you adjust with that, then actually we had 5% growth last year in corporate loans. which is, again, a very positive development and hopefully will continue into next year. And this positive trend will last. And at the same time, we managed to slightly improve our market share in Hungary, in large Hungarian corporates, as you can see. it was 19.5 percent the second highest closing level ever after this uh short uh summary about the hungarian situation let's have a look at the the foreign uh outside hungary operations and their results and as you can see um in terms of profit contribution, improvement, and most importantly, ROEs tend to be quite positive. So we have the Eurozone or quasi-Eurozone countries at the top. Bulgaria, Slovenia, Croatia, given the cost of capital in the kind of Eurozone countries and the risk profile is quite admirable levels of return on equity. Serbia did again very well after 23, 24 was a very strong year. We have strong growth and the new kind of strategic focus on deposit collections and transactions and so on and so on. So this seems to pay out. Uzbekistan, 30% return on equity. Obviously, the rate environment here is much higher and the cost of equity is much higher. But nevertheless, this, from our perspective, is a quite good number, given that this was the first full year after the acquisition. And already in the first year after the acquisition, we made 30% ROE. Despite the fact that we had strong operational challenges, we had to work very hard to improve the operational, especially IT environment in the bank in order to make it sustainable. capable to service the very high level of volumes, which are potentially possible given the strong demand on the market, especially consumer loans. So these results we achieved despite the fact that we had to We had to rein in or kind of limit, in a way, our lending activities and consumer loans because of these operational weaknesses, which we managed to improve after a lot of extra costs and extra investments. Actually, so we are starting this year with a much better level of operational capabilities and I expect a kind of step up in our ability to sell new consumer loans and hopefully there will be another step up somewhere at the second half of this year and then I think we will By then we will have fully caught up with the kind of service leaders on the market. Ukraine, again, did very well despite the 50% corporate rate. Just like in 23 and 24, the corporate tax rate was doubled from 25 to 50 at the end of the year. By the way, if you look at the quarterly numbers, you will see that Due to this, and only due to this, actually Ukraine was negative because we had to book this additional tax for the entire year in the last quarter, fourth quarter. And even our smaller businesses have been doing reasonably well, or actually quite well, close to or above 20% ROEs, Montenegro, Albania, Moldova. Well, if we look into NII improvement, again, 20%, FX adjusted, very strong growth in Hungary, as you can see, but potentially more interesting is the NIM, the Net Interest Margin Development, as you can see on the following page. In fact, if you compare the quarters, so the last period from 23 with the last period of 24, the margins are remarkably similar. So this year-on-year improvement actually happened back during 23. So most of the margin improvement actually happened between the first quarter and the last quarter of 23. And during 24, the margin has been pretty stable with some kind of internal changes. Some of the factors changed or the different margins. There were some further improvement in Hungary, as you can see. Whereas primarily in the European countries, Bulgaria, Slovenia, Croatia, But I would add here kind of Montenegro as well to some extent and even Serbia where quite sizable shares of the volumes are in Euro denomination. We see a margin erosion and that's due to the lower Euro rate environment. So these are the kind of two major factors. One is kind of gradual improvement in Hungary And on the other hand, headwind and pressure on the Euro related part of the business and the two and a kind of favorable composition effect given the higher growth rates in the higher margin countries so all these kind of three factors together resulted in a pretty flat year kind of fourth quarter year on year group margin level of 427 The following page further illustrates this. On page 11, you can see that if we compare the 23 average margin to the 24 average margin, Almost all of the improvement came from Hungary, the Hungarian court. But again, that improvement actually happened between the first quarter and the last quarter, the fourth quarter in Hungary in 23. So there during, in fact, during the 24, there was quite much smaller change as you saw on the previous page. In terms of sensitivity to rates, there was a further small decline in the euro sensitivity, so now it's around 90 million euro annual NII in case of 100 basis point decline in the euro rate. Technically, this number will probably not go so much lower, so it's likely that it's going to stabilize at this level. Also, because we are less concerned, given the last few weeks developments, especially the last week development about the risk of the Euro rate to drastically collapse. I think that risk has decreased given the new initiatives, what we see across Europe. And we believe that's fundamentally a good thing. Half-rate sensitivity remains quite low, so it's kind of immaterial around this 6.5% level, where, I mean, structurally, obviously, higher is marginally better than lower at these levels. Based on that, you can see the performing load development, 9%. In 2023, we had 6%. So, considerable improvement compared to last year. And I think almost each country is a very positive story. In fact, it's Slovenia where the loan portfolio increased. didn't grow, but to be honest, the most profitable consumer loans actually grew 10%. And the much, much less profitable corporate portfolio declined. Corporate margins are very, very, very tight in Slovenia. And in Uzbekistan, still at the beginning of the year, we had some corporate loan migration to stage three. um bucket and therefore the performing loan volume declines so therefore overall we have a decline here and uh despite some growth in in consumer loans again this is not the full potential of the market we had to somewhat uh limit uh our growth uh organic growth in consumer loans in in in Uzbekistan having said that mortgage growth was reasonably strong But going back to the kind of higher growth market, Hungary mortgages especially 13%, very strong dynamics. Again, year on year, new production growth was more than two times. Consumer grew 10%. That's also okay. And then we have Bulgaria, very strong on the retail front. Croatia, again, very strong on the retail front. Serbia, very strong. Montenegro, very strong. And in fact, we... kind of restarted lending, refocused our activities to lending in Ukraine, albeit from a low basis, but already last year we achieved 20% loan growth. And in consumer, in retail, it was 50%. And Albania, after the merger, which was completed at the end of 23, in 24, we kind of 100% refocused on our kind of business activities, clients, and sales, and that resulted in this close to 20% growth. If we look at the quarterly growth rates, then it's actually we see that in one quarter, Lomboyans grew 3%. So that means that there is some acceleration in the rate of growth. So this kind of 9% annual growth, accelerated during the course of the year and the fourth quarter was actually 3% just quarterly growth. If we look at deposits, page 14, you can see that overall deposit growth was 6% and that pretty much kept our net loan to deposit ratio flat year on year. So overall for the whole group is 74%, as you can see at the bottom of the table. And while from a profitability point of view on a group level, Probably the single most important driver was this 10% growth in Hungary. So this is potentially the most important indicator across all the numbers where we have this drive profitability within the group. And that was a very welcome return to the previous old trend after again this ditch in second half, 22 and first half of I think it's worth mentioning Serbia 17% and Uzbekistan 48%. Both of these countries I mean in Serbia Back in 2021, year-end, the net loan-to-deposit ratio was 135%, and this has gone down to 96%. And at the same time, profitability improved considerably. So that, again, this is the strategic refocusing there, which I mentioned, more on transactional transactions, accounts, salary clients, and fear avenues, which resulted in a much healthier balance of deposits and loans and made this a self-sustaining business and also actually contributed positively to profitability. And in Uzbekistan, close to 50% growth. You probably remember that when we acquired this bank and even kind of end of the first quarter last year, so just a year ago, the loan-to-deposit ratio was closer to 300%, more than 280. And this has come down to 178. Again, this is healthy and very much welcome development. Not so much on a quarterly basis here, but if you go to pay 16, free income, above 10% growth, actually 13%, strong across the board, I think. It is a very healthy, in general, trend we're happy about. Other income, not much growth. In fact, pay 17 flat year on year. Again, this is mostly to this fair value adjustment. As I mentioned when I talked about the Hungarian business, the fair value adjustment in Hungary on the subsidized loan was considerably less in 2024 and 2023, and that resulted in an other income decrease, as you can see, quite substantial decrease in Hungary, but all the other kind of units in the group managed to almost counterbalance that, including the runoff impact coming from the sale of our business in Romania. Operating cost 11% growth, which is, I think, a pretty good achievement, actually, given that inflation is still strong. But more importantly, wage inflation was last year still strong. And obviously, we have been growing also fast. And in some countries like, I mean, Uzbekistan, namely, we have strong investments into the operations of the banks. So that was another factor which increased somewhat the costs. Risk cost, page 19. somewhat potentially higher, and certainly the fourth quarter was higher than what was expected by market participants. But this was not so much the credit risk, it was more the other risk. So the credit risk cost and the credit risk cost rate was higher. uh as you can see almost flat uh last year but the increase came from uh this kind of other risk course we uh namely the the provisioning for the uh for the russian bonds which in 24 altogether in hungary and in bulgaria was 43 billion half I mean, and that actually increased the amount of provisions behind these loans to almost $100 billion, so it's $98.5 billion provisions. I mean, this is, I mean, in a good scenario, if sanctions are lifted or listed, and the Russian sovereign debt, then potentially these provisions could be partially or entirely released. So that's a potential upside, but obviously that's a big if. And there was another kind of larger one of provisioning in Serbia to one specific client at the end of the year, close to 14 billion risk costs was attributed to this exposure. Other than that, more or less kind of stable environment, obviously, in countries like when we had very strong growth, like in Russia, we had to increase provisions. And likewise, Bulgaria, strong volume growth resulted in a In a kind of meaningful level, I would say a provision in 40 basis points, I wouldn't say it's high, but it's certainly higher than the previous years at the negative levels. All in all, if you look at portfolio quality for the whole group, there is improvement. So the stage three ratio went down from 4.3 to 3.6%. which is positive. And if you take out the kind of high provisioning level and high state-three ratio level countries, Ukraine, Russia, Uzbekistan, then the ratio year-end was actually lower than 3% without these three countries. There's one negative event, so to say. It's not a trend, it's just an event. On the fourth quarter, last quarter, there was an increase in the stage three ratio, primarily given by Slovenia and Bulgaria. In both of these countries, we adjusted the IFRS time models and the methodologies in the to somewhat more conservative. The expectation of our colleagues is that these increases in stage two volumes are not going to migrate or are not expected to migrate into stage three. So that's more a kind of more conservative view on the existing level of risk in the portfolio. coverage ratios remain strong as you can see where the biggest differences can be observed observed between the different banks it's the performing lens right so stage one and stage two loans provisioning and coverage levels It's close to 2% for us, and some of our competitors are much, much lower levels. And even if you take out provisions from this, the countries where we have a higher level of coverage, like Russia, Ukraine, Uzbekistan, the remaining parts of the of the group, which is Central Eastern Europe, 1.4% in performing loans coverage is typically two times or even much more than typical competitors. Capital, page 21. We closed the year with 18.9% common equity tier one and tier one ratio. And the MRR ratio went up to 30%. So I think very comfortable levels of capital. Having said that, there are some items we have to consider in order to have the full picture. As you can read on this page, the last bullet point, in the right lower corner, explains the impact of Basel IV implementation starting from January 1st, 25. And as you can see, the impact was 85 basis points. That's the decline in the common equity tier one and tier one ratios from end of December to 1st of January due to regulatory changes, namely the implementation of Basel IV. So this is going to be reflected in the first quarter numbers. There's an other expected remaining Basel IV impact, Another 1.7% potential increase in these traded assets. But this is going to impact the numbers only in 2030. So five years from now, having said that, they expected if we had to implement everything now on 1st of January, there would have been an additional 1.7% increase in our RWA, which translates into 30 basis point potential decline in common equity tier one. So that would be the kind of fully loaded immediate bazaar for impact 85 which we actually realized and plus 30. and there's another element here which may not be on the page but you can see in our reports that we still have a transitional factor here an uplift coming from the transitional measures and that's 40 basis points And these transitional measures will face that during this year. So the year-end numbers this year will include another 40 basis point negative. I'm sorry if it's too complicated, but what I wanted to say that the kind of fully loaded impact of Basel IV, what happened 1st of January and additional one, which is going to happen 2030, plus the existing transitional measures phasing out during this year, this kind of fully loaded effect would be 155 basis point negative. So the kind of fully loaded number year-end last year was 17.35 compared to the 18.9, which was actually the reported factor. You can also see here on this page, that's probably better explained in a way, visually, the drivers behind the increase last year. And by far the biggest impact was coming from the profit, eligible profit. And obviously that includes the proposed dividend payments. So those are deducted from these numbers. and a 3.2 percentage point coming from profit. And then there was this uplift from the selling of the Romanian business. We are more or less hedged from a capital perspective on the FX impact, so the net impact was zero. And then risk-weighted assets, this 9%. performing low volume growth year on year, consume 1.1% of percentage point of the common equity tier ratio and then some other smaller impacts. So that's the total decomposition of the change. Liquidity, we can see our liquidity ratios here. Uh, 270% liquidity coverage ratio. That basically technically means 19 billion euro equivalent of liquidity buffer above the 100% minimum LCR requirement. So quite comfortable. And you see the call rate profile to the remaining calls. We have done actually two was already during the year quite moderate 276 coming in 1.1 billion coming next year. So it's a relatively modest maturity profile of what we have. We issued in January a very successful tier two instrument in dollar. as you can see on this page and we may issue in the second half of the year further mrel eligible potentially senior preferred ones but this is not yet decided and sure it will depend on the business dynamics and and other numerical factors After talking about the past, maybe a few words about what we expect in the future. Overall, our expectations tend to be optimistic. In almost all of the countries where we operate, we expect GDP growth to accelerate. And for Hungary, we put the government expectation, which is 3.4%. Typically, market participants expect and project less, around 2.5%. But even if it's 2.5%, it's considerably more than the 0.5% what we had last year and the actual recession what we had in 23. So no matter whom you look at and listen to, the expectation is that economic activity is going to accelerate. Bulgaria, actually, we got the, just today, the latest number came out, the official number came out for 2024. And that was much more than market expectations. So the Bulgarian GDP growth last year was 2.8. The fourth quarter was actually very strong. So we probably have to upgrade our our expectations and probably to the range of 3.54%. And again, Bulgaria finally firmly expected to join the Eurozone, which we believe is going to be very positive for the country beginning of next year. But in all the other markets, we see potential improvements, maybe except Uzbekistan, which is a slight slowdown, but the slowdown is to 5.8%, which is still a very admirable level of growth rate. So overall, we expect improvements in the operating environment. And this expectation does not include major changes in the environment. And I think the kind of major changes we expect to be, if they happen, to be definitely positive. In fact, our expectation is that... much sooner than later we expect to see an end to the war in Ukraine and settlement there. And that overall can have a very, very substantial positive impact Well, primarily on Ukraine, obviously, but also in the countries in Central Eastern Europe, which will be closed and potentially participating in the strong expected developments and investments in Ukraine. And I mean, most likely as well, the kind of war discount, which was priced into our valuation when the war started in 22, would also considerably further decline. So in any case, that would be a very positive development. And there's another potential possibility positive impact here which started to accelerate actually during the this week and that is the finally at last the realization we see some signs Actually, our interpretation of the development in Europe is that it seems that Europe is finding its way back to realizing and recognizing its own interests and maybe even act upon its own interests, which is... certainly a very positive development and can fundamentally turn around the expectations and the story about Core Europe. So that's a potential third positive impact from a resolution and settlement. Page 24, our formal guidance. As you can see, again, we expect a somewhat better operating environment, and therefore the expectation regarding loan growth is that it's going to be somewhat higher than what we had in 2024. So we expect higher performing loan growth than 9%. I think it's fair to expect more or less stable margin. It has been quite stable, actually, during the course of 24, and we have same expectations for 25. Cost-to-income ratio might somewhat decline. I mean, we still expect strong, especially wage inflation, to continue. Portfolio quality, again, Especially if we talk about the loan portfolio, quality seems to be stable and we don't expect strong deterioration here or worsening compared to what we saw last year. And altogether, again, we seem to be on a higher leverage this year than last year in certainly increasing equity volumes. So this may lead to somewhat lower return on investment. equity numbers. And our current proposal for dividends is 270 billion, which is a substantial increase compared to what we paid last year. Last year, you may remember, we paid 150 billion But this is, there will be a board of directors meeting in March, which is going, and that forum is going to decide about the formal proposal to the shareholders to our AGM. And that formal proposal will appear with all the other AGM materials on the 3rd of April. Finally, we included some specific language regarding capital matters. The first one is related to buybacks. We did two we have done actually three rounds of buybacks starting from beginning of last year to last year and already won this year each of them were six uh 60 billion half and this process may continue um and it's also subject to uh regulatory approval, obviously. And this is what we kind of can say about this or want to say about this. And we will continue to announce these specific buyback packages once they are approved by the National Bank. Since we have Still, despite these buybacks, the accumulated amount of shares is still quite low. So we decided not to formally address the issue or the opportunity to call or not call back these shares or cancel or not cancel these shares. So that remains open and we are not making a proposal on this this time. In terms of capital adequacy targets, I mean, it's a difficult kind of topic because we We operate on a much higher level than the regulatory requirements, and from a modeling perspective or a fact-based analysis perspective, there's no real reason to keep these high levels. The reason we are tempted to be... to have these somewhat higher buffers or much more higher buffers than would be warranted is due to the fact that we want to be considered, continue to be considered well capitalized. And that consideration is typically established on comparison with others, with our peers. So we think that the best way to approach this the optimal level of capital adequacy is not so much compared to the actual regulatory requirements, but more to the comparable banks to us. To compare to them, we want to look or be considered as well capitalized and strongly capitalized, and that usually is established on the common equity tier one and tier one ratio basis. So that's the kind of anchor for us where others are. In terms of allocation of capital, clearly first priority is organic growth, profitable organic growth. Well, we continue to explore potential value creating M&A opportunities. There's nothing new about this. We have been doing this for the last 25 years and altogether we acquired actually 25 banks during this period, 14 during the last 10 years. But in this 25 years period, there was almost We had nine years where we didn't buy anything between 2006 and 15. So it can easily happen that despite our efforts to find these value-creating opportunities, for a number of years we may not find any, and that's perfectly fine and okay from our perspective. So we don't feel to be pressured to do acquisitions just for the sake of acquisitions. In terms of utilization of a tier one or additional tier one, and this is structurally we haven't used this instrument for a long time. And this is what we label as a kind of reserve for potential higher, bigger acquisition opportunities. So the size of the bucket at the moment is now roughly, it's close to 500 billion and a half. And the unfilled part of the tier two bucket is another 100 billion half. So altogether, these two 600 billion half, that's 1.5 billion euro. That's our kind of fundamental reserve for potential larger acquisitions. So should there be a larger opportunity where we could only pay uh with using these instruments we would use these instruments to their full extent so that's uh these are some some thoughts on on capital and capital strategy as such and with this and final space disclaimers and con i think it's uh particularly important given that we actually shared with you on page 26. We shared with you our expectations regarding this year. So read the disclaimers. And with this, I'd like to finish the presentation and invite you to ask your questions.

Thank you, ladies and gentlemen. We 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 Matthew Nemesh, UBS.

Hi, good afternoon, László, and thank you for the presentation. I have a couple of questions. The first one would be on interest rates. Can you hear me?

Yes, we can hear you well.

Excellent. I have three questions, please. The first one is on rate sensitivity, specifically in the euro businesses. It's helpful to get your estimate on the short-dated sensitivity. I was wondering if you could talk a little bit about the euro businesses' sensitivity to higher long-end yields, a steeper yield curve, just on the back of what we are witnessing here. in the past couple of days. Is that mainly through the longer dated part of your rate hedges or fixed rates securities portfolios? And then secondly, if you can in any way quantify for us. That's the first question. The second one.

Sorry, excuse me. I'm sorry. I had to log out and in because my speaker was not working. So may I ask you to repeat the question? I'm sorry.

Thank you. I was asking about the euro business and specifically the sensitivity, interest rate sensitivity to the higher long-end yields, a steeper yield curve in a sense, just really on back of what we are witnessing in the past couple of days. First of all, is there any way for you to quantify this for us? And secondly, what is this mainly through the longer dated part of your euro rate hedges or fixed rate securities portfolio? If you can talk a little bit about the, channel here. The second question would be on potential tariffs. I wanted to check whether potential tariffs are impacted or reflected in any way in your GDP growth scenarios or your stage two provisioning as of today. And if not, is there any way to get sensitivities on this one? And the last question is on dividends and capital allocation. It's very helpful to get this additional slide, slide 25. You also mentioned that it is possible that you will not find dividends. suitable M&A targets for an extended period. In that case, how long are you willing to tolerate quite elevated CET1 ratios even after a Basel IV impact, just given the fact that you're generating something around 400 basis points across capital built organically before distributions? And even on a net basis, you're looking at roughly a good 1,500 basis points build just based on your targets. So it seems like you're building capital organically quite fast. How long are you willing to wait for M&A and what would be your decision process around higher distributions? Thank you.

Yeah. Steeper Euro curve. I mean, yes, obviously we can model this. I don't know the kind of sensitivity of the, I don't know, five and 10 year point moves up by, I don't know, 50 bps and what exactly the impact. And it's a kind of, it's complex because then obviously the short, I mean, there's an immediate potential impact if you reprice the entire portfolio, but we have typically the The euro assets, fixed assets, assets of Fibro, they are in the whole maturity portfolio. So we are not going to market them, right? So the kind of piano impact in case of yield curve steepening is not going to manifest in the short-term profits. Obviously, you could still recalculate if we were to buy or replace the entire portfolio. what would be the immediate negative impact and the potential positive. But given that you also have that the sensitivity is directionally different, right? If the If the long end goes up, then the immediate effect is potentially negative, but our earning expectations are positive, right? Because the long end goes up because we expect the rate environment in the future to be higher, right? Than our previous expectation. So if we were to do... actually a modeling of our earnings for the next 10 years, then I'm not so sure whether the impact would be positive or negative. I would rather say positive. so in in general in a higher rate environment with a given within given boundaries uh we we tend to do better long term than in the lower rate environment so if you look at the long enough time frame then we do better in a higher rate environment that's very clear uh Tariffs, that's an incredibly difficult question that you asked. A relevant one, but incredibly difficult. Even keeping track of just the actual tariff rates and customs rates in different countries, U.S. customs rates, is difficult. uh the potential impact again very difficult and uh i mean historically the experience is obviously very negative with tariffs and we certainly don't believe that you can increase wealth uh overall by increasing tariffs it's quite the opposite so Therefore, we still struggle actually to fully believe that we are going to live in a world where tariffs between strong trading partners and strong geopolitically aligned strong trading partners are going to be very high. It is still a difficult thing to digest. So in a way, yes, they include in general terms, But technically, this is not a doomsday scenario, right? Where we're going to have 25% tariffs in all global trade, which would result in an overall global GDP downward adjustment and potential other very, very negative ramifications. So this is clearly not the kind of worst-case scenario what we showed here. This is our likely – these are our expectations for this year, assuming certain level of impact coming from the taxi, the higher tariffs, but not kind of fully destructive scenario. And to – now – our clients are typically not exporters to the U.S. We are typically not financing the large European multinationals. And therefore, on a client level, specific client level, actually the potential exposure to these tariffs is reasonably low. The trade links, and especially in our client base, are fundamentally domestic or related to core Europe. Your third question, the targeted level of common equity tier one and tier one, and how much dividends you're going to pay. We don't the intention is not to kind of pile up large reserves capital reserves other than what needed is to again to be considered very capitalized so i think if you just look at our uh comparable kind of regional regionally active uh banking groups I don't know, Erste, Raiffeisen, Unicredit, Intesa, KBC, look at their Tier 1 ratio, we potentially want to look better and higher somewhat in Tier 1 ratio terms. And we don't know how much, I mean, this Basel IV impact, we don't know how much they're going to be impacted, but But even at the end of this year, we don't want to keep much more capital than what needed is for that level of tier one, right? Which fulfills this kind of target or desire to remain to be considered very well capitalized. And the specific reserves for potential larger acquisitions, as again we said on this page, they are the unutilized alternative Tier 1 and Tier 2 buckets.

Thank you, Laszlo. I appreciate the detailed answers.

Thank you. The next question is from Gábor Kemény, Autonomous.

Hi, Laszlo. A few questions from me, please. The first one is on your net interest margin guidance. Would it be possible to split this out, how you expect the NIM to develop in Hungary and how you expect in the foreign businesses to specifically in hungary you point out that the developments of retail deposits is a big lever of the of the name and we actually saw the the retail deposits going up in the fourth quarter so um what is the chance that we will see a further name expansion at otp core and my Other set of questions would be around, again, around capital deployment. Just staying with the buybacks, I mean, you managed to complete the first buyback of the year, actually, yeah, what was approved early in the year very quickly. Can you help us size the scope for share buybacks for this year? And maybe you can touch on what was the logic around paying a premium for a relatively larger block of shares back in February. My last is a broader question and actually a follow-up to your previous comments on running with a higher capital ratio for possibly longer periods. shall we think about this as an ROE drag longer term so in other words is it a kind of base case that we will see a lower ROE again next year because of leverage falling or do you see any different scenarios thank you yeah

Again, the name, and I think in the sense the last year was, again, interesting and the kind of good guidance for what can happen during this year. So, again, if you compare the margin, the fourth quarter 23, which was on page 10, actually, to fourth quarter 24, on the group level, it was stable. Hungarian margin improved somewhat, not a lot, right? 19 basis point. And in most of the other banks, and especially the Euro-driven banks, there was some decline. And in fact, this can continue. So something like that, we expect to continue into this year. So maybe some improvement, further improvement in Hungary, just, I mean, based on what you just mentioned, increasing retail deposits and potentially further compression in the Euro-related margins across the group. And these two plus the composition effect, maybe higher growth in countries with higher margins, for instance, Uzbekistan or Ukraine potentially, can further contribute positively to the NIM. Buy back, I mean, we decided to provide you with this guidance and really I don't feel comfortable telling more because we kind of carefully worded these sentences. So what we can say that you may continue to buy back during the course of this year. And if we do, and if we receive an approval from the national bank, we announce that change on the day when we receive the approval. And excuse me not to elaborate on the potential size and so on and so on. we were we were not uh prepared to to to give numeric guidance on the potential size of the scope of of uh of potential uh future buybacks but i mean maybe you can infer something from what we have done right but that's just uh so the guidance is just uh yeah thanks okay uh again our leverage ratio is above 10% and it's I mean it's double the European requirement so this is not optimal certainly and we don't want to So the intention is not to, again, sit on unnecessary levels of capital. And once we see how others cope with Basel IV and the impact on them is, then I think we will have a clear picture and then we will, again, follow our competitors. I mean, in an ideal environment, our competitors should go down by, A couple of percentage points. To be honest, I don't understand this, why European banks tend to have a competition who has a higher capital ratio. we are still kind of small compared to the large banking groups in Europe, especially in terms of size, where profit is getting there. And we are labeled as potentially higher risk, which may or may not be true. But therefore, we are certainly not the anchors, right? So we don't believe that we are the benchmarks for other European groups when they consider where to position their capital ratios. We may get there in a few years, but Today, we are clearly not a benchmark. So we have to kind of adopt and adjust to others. And to be honest, I struggle to understand why the European banking sector is so much above the regulatory expectations. I don't understand this.

No, that's all fair. Thanks for the call. Yes.

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 next question is from Simon Nellis, Citigroup.

Hi, Laszlo, thanks for the opportunity. I was hoping you could just help me out with the capital walk in the fourth quarter. Did you deduct the new buyback, I think the 60 billion from CT1? And also, I guess there was a large dividend deduction in the quarter, but it seems that your quarter one went up more than earnings once adjusted for these items. So just wondering what's driving that. And then also on the risk-weighted asset growth, it was 5% in the quarter. Why was it so strong? I think loan growth was below that. That's my first question.

Wow. No, the buyback, the recent buyback was approved in January, so that was certainly not deducted. The dividend deduction increased because previously we used a much lower number, which was this European regulation. If a bank doesn't have a formal approved dividend policy, then you have to... deducted previous whatever years. So there was this increase in the expected dividend payments and therefore the deduction from capital due to the fact that now we have a management proposal actually, which is formal. Risk-weighted assets growth. I mean, low growth was actually 3%, right? In one quarter. And And this is like FX adjusted. And so maybe the FX component was contributing to somewhat higher than the performing long breath. And other than that, I don't know. I don't know either. was probably the difference between the half I think the half rate weakened pretty much like 3-4% during the last quarter and that obviously translates into higher half denominated risk rated assets so I think the difference between the 3% loan growth and the 5% was probably coming from this.

Okay. My other question is on Serbian risk cost. You flagged some issues with, I think, a large corporate client. If you could elaborate a bit on that.

I mean, YouTube Bank secrecy, I obviously cannot name the client. Mm-hmm.

This is not linked, I guess, to the political unrest there or the protests.

No, it's not related at all to the political unrest, but it's related to other more geopolitical considerations, I would say.

So do you think you'll have to continue provisioning on that exposure?

Fundamentally, no.

And then just maybe last on M&A, so is the transaction in the Baltic markets, is that pretty much off the table now, or what's the latest on that?

Yeah, I think enough time has passed since the the actual involvement that it's it's fair to say what you your i think your assessment is fair okay thanks very much sure thank you the next question is from gabor book the concourse securities

Thank you for your presentation. I have a question regarding the windfall tax in Hungary for 2025. So you're guiding around 54 billion forints in windfall tax. So another 54 may be deductible this year. And I'm just wondering how much

uh hungarian government bonds uh have been uh purchased so far yeah but now we have we believe we have fulfilled the criteria uh to qualify for the full for this for the uh for the reduction in the windfall tax So this number 54 billion expected payment reflects the current situation.

So does it mean that the bond portfolio was lifted by around 500 billion forints in notion of value? Yes. Thank you.

Thank you. The next question is from Mehmet Sevim, GP Morgan.

Hi, good afternoon, Laszlo. Thanks very much for your time. I have a couple questions, please. Just on Hungary, do you see risk for any additional government measures this year, considering this is the pre-election year or anything else, any signals that you can share with us? Secondly, just on Bulgaria, you mentioned the Eurozone entry, hopefully from the 1st of Jan next year. What sort of impact should we expect from that? I think maybe a bit positive on the liquidity side because of reserve requirements, maybe, I don't know, negative on fees. How would you see the developments there next year following the Eurozone entry? and maybe thirdly just the buyback that you did earlier this year um this is already completed is that fair to assume so um it seems like it it went a lot faster than the other two that you did earlier in the year so um could you give us any color on that front policy measures uh we hope not having said that

This is not something where we that's not in our hands, right? There are two initiatives, what we heard about, or potential proposals from the government. One is that they want to consolidate the the deposits of the municipalities and they want the treasury to keep those. And that can potentially reduce our municipality deposits in Hungary. There are discussions at the moment about this proposal between the Banking Association and the Minister of Finance. If it happens, it is negative. It is marginally negative. It wouldn't be a huge impact, but it is clearly negative. The other one is the Minister of Finance started to talk about the last two days that the e-levels are potentially high for banking in Hungary, which is, I mean, yes, the transaction tax is also uniquely high. So there's some obviously Truth in that, that compared to the other countries in the region, the clients pay more for transactional services, but there are these excessive, huge, especially transactions related levies that we have to pay. So that's the reason, obviously. So there might be some discussion about that as well. And again, this is potentially a negative risk. But there's nothing concrete, and it's really fresh. The last two days, there was just a comment from the minister. There might be some discussions, again, in the Banking Association regarding this. Okay. Indeed, I don't want to deny that this is a risk. Policy risk is potentially one of the biggest risks across the group. And it's, I think, specific to Hungary or specifically concentrated around Hungary, I would say. You're also an entry in Bulgaria. I mean, the primary impact, as you just said, the reserve requirement is going to go down to the European level to 1%, which is going to be a kind of one-off positive. But I think we expect a more fundamental positive impact here. And that is related to the overall business climate and business development. If you take the Croatian example, that, I mean, the impact of the Eurozone and the Euro accession was quite positive. And we are talking, I mean, really accelerated the growth. The risk profile improved considerably. Investments increased significantly. uh market uh sentiment improved so i think people still don't see the the the potential upside here in the and and and we are certainly fundamentally more optimistic on the impact than people in Bulgaria, to be honest. So, I mean, yeah, that will be a one-off positive, which will be mitigated by somewhat lower revenues because we lose the FX conversion margin. But the positive impact from the lower reserve requirement will be bigger. But beyond that, The overall expectation, which should kind of manifest over a number of years, is a much higher and more positive trajectory for the country overall. Don't forget that the leverage in Bulgaria is extremely low. The debt-to-GDP ratio is around 25%. And once they are in the Eurozone, I think they can start developments which should have been done, infrastructural developments in the country which should have been done during the last 20 years and has not been done. So I see a big upside there next three to five years. Yeah, the buyback was completed. We did one bigger transaction plus. I mean, to be honest, we are very happy to see the share price much higher than a year ago, but that also means that the same amount we spent much faster than we spent last year. So that actually creates more in terms of nominal volume, nominal kind of value-wise, more buyback potential, so to say, or opportunity, right? Because we don't so much want to move the market, so a kind of neutral buyback amount can be a much bigger one than a year ago when the share price was lower.

Thank you. Can I just ask if you have an indication of the size of those municipality deposits in your balance sheet? And can I assume these are all in current accounts?

No, no, no, no, no, no. These are not very cheap deposits. So these are not like Hungarian retail deposits. That's actually a very competitive market. There are few competitors, but they are very fierce. So the total amount is close to 500 billion. But they are not kind of taking away the entire amount. Again, this is kind of fluid, and there's a discussion on this at the moment, actually, between the Banking Association and the government. So in a bad case scenario, and it's going to be implemented only in the last quarter, in the first quarter. So they kind of announced this now, but it's going to be implemented from October. Therefore, the impact, if any, will be relatively modest on this year. And we may potentially lose by the end of this year if fully implemented 250, 300 billion. of municipality deposits.

Okay, very clear. Thanks very much.

Thank you. Thank you. If you have a question, please click on the raise hand icon or press star nine. Yes, the next question is from a attendee joined by a phone. I open the line. You will receive an automatic message about it. Please press star six to unmute.

Okay, sorry. That's me, from . If you can hear me, just a question maybe on long-growth outlook breakdown by country for 2025. I mean, you mentioned 9% the targeted level. So what would you expect maybe particularly from key countries' perspective like Slovenia, Hungary, but also Bulgaria, Croatia, Serbia, and which kind of outlook for corporate business have you picked in your target? Thank you.

Okay. So last year we had 9% growth, and the guidance is that this year might be somewhat higher. I mean... Certainly corporate, we expect to be stronger this year than last year. In some countries like Hungary, Slovenia, Even Bulgaria were not very strong or rather weak in terms of corporate demand. And in Hungary, under the last quarter, the fourth quarter, started to show some signs of demand. So certainly in these markets, some improvement we expect. Having said that, We don't expect major improvements. So don't expect to double our last year 9% growth. So we are not talking about that. There can be marginal improvement compared to the 9% that we had last year. And indeed, this is our expectation. But this is more kind of across the board and includes growth. For instance, Uzbekistan, where consumer lending should grow much more than the 8% last year. So definitely in Uzbekistan, we expect acceleration. Also in Ukraine, we expect continuous stronger growth. It's from a low base and on the group level, these are small amounts, but in terms of growth rate, there's some acceleration expected there. Overall, certainly Slovenia. Slovenia was not strong last year. Again, corporate margins were low and we were busy with the merger. We finished the merge at the end of August and we have a new CEO joining us in a month. So in a way, we were busy last year with the merger, which was very, very successful. on time, on budget, approved by ECB, so on. And we are waiting for a very talented new CEO to join us quite soon. So, I mean, it's not just a market. It's also, from our perspective, we expect more agility and business focus this year than what we projected last year. But the rest of the countries should either continue as they have done last year or kind of marginally somewhat improved, given they marginally somewhat better. operating environment expectations what we have.

Okay, appreciate your answers. Thanks a lot.

Thank you. Thank you.

Thank you so much. If you have further questions, please indicate it. The next question is from Beata Vojcik. May I ask the company please

Sorry, can you hear me now?

Yes.

This is from SNP Global Market Intelligence. Thank you for taking my question. I wanted to ask for your outlook on your Russian business, because I saw in the presentation that Russia did really well in terms of REO, lending growth, deposits, and if the sanctions, and I know this is a big if, but if the sanctions are lifted, Do you expect further strong growth in the country? And also my other question would be, if the sanctions are lifted in Russia, would you consider adjusting your business model in the country, for example, going back to corporate lending or maybe increasing the number of branches and basically, you know, bolstering up your business in the country? Thank you.

We don't speculate on this, to be honest. So that's not in our focus at the moment. We are trying to do the best that we can do in the current very difficult environment in a way. And that is basically a threefold kind of strategy. Primary, most important one is to fulfill every rule and regulation, especially sanctions. And then again, we stop a number of activities, among them corporate lending. So we reduce the scope and then we try to reduce our exposure as much as we can. And in our understanding the only way to reduce your exposure is by taking money out so we we have been our bank has been paying dividends and altogether 42 billion rubles has been paid during the last two years in rubble and and this we we we try to continue to do And if the environment changes, then we will look around and assess that environment. I don't want to fantasize, right? Because this is something we don't know. And I think it's too early to think about that. In a way, I think we are doing now what this bank has been always strong doing and that is basically consumer lending. And the fact that we discontinued corporate lending actually helped the institution to focus its resources and activities and management attention to 100% to consumer lending. And that is doing actually very well. So I don't feel particular urgency to, even if sanctions are lifted, to go back to corporate lending. I don't think we will ever be a major bank in Russia. So that's not where, and there, so this consumer lending business, that's what the bank is good at and has been good at. and and serving retail clients and and and i mean we are actually very happy that during these difficult years the last couple of years the bank achieved remarkable uh advancement and improvement in in digital services so now I don't know, 70-80% of the sales are purely digital and they really caught up with the rest of the market, which is quite advanced in terms of digital services to retail. So I think this is, if anything, this is probably the most strategic development there to fast improve digital capabilities and retail banking service levels. And And really, we don't spend our time and energy on figuring out what to do in a scenario which we don't know. But hopefully, I mean, the situation will improve and then we will have more options and more possibilities and the valuation of the business that we have there might improve. And in itself, those are good things, right?

is that okay as an answer yes thank you thank you thank you thank you please feel free to ask if you have any questions as there are no further questions i hand back to the speaker okay thank you very much thank you for your interest thank you for participating on this uh

on this call and thank you for your very good questions i hope you will join us during our next location in early may when we present the first quarter results and until then i wish you all the best and goodbye thank you for your participation the fourth quarter 2024 conference call is closed now