Otp Bank S/Adr R

At this point, I would like to hand over the floor to Mr. Laszlo Bencsik, Chief Financial and Strategic Officer. Laszlo, the stage is yours.

Thank you. Good morning or good afternoon, depending where you are. And thank you so much for joining us on this mid-summer day. It's very warm here in Budapest and very sunny and unfortunately very dry. and the way fighting with the elements. Now, if we follow the usual, we are going to follow the usual process. We are going to show you the presentation, but the presentation is also available on the website so you can download it. And first I go through a reasonably brief presentation and then we'll have a question and answer So we may just start going to page two, the kind of high-level features or most important messages. They have not changed, so I don't think we should dwell on these. We continue to deliver on those lines. Page three, we try to summarize the situation and make sense of the numbers. Because in order to be able to understand the underlying business developments, we need to somewhat specify which numbers we are looking at. If we just look at looking at only the reported numbers, that is 306 billion half profit after tax in the second quarter and 483 billion half profit after tax for the first half and looking at the quarter and quarter and year on year developments of these numbers is not particularly insightful. One big problem with these numbers in order to make some sense of them is the usual one which we have been facing for a number of years that this extra profit tax and the bank tax and the in general the supervisory fees across the group they all have to be booked at the beginning of the year and since the the size of these numbers have grown unfortunately quite and so on. This has a huge impact on the quarterly distribution of profits. On top of that, the extra profit tax keeps decreasing throughout the year as we continue to fulfil the requirements in order to reduce or kind of be able to have the discount on the extra profit tax. Therefore, we kind of show you these prorated or adjusted numbers where we show the numbers as if these extra burdens were evenly distributed between the four quarters throughout the year. And those are the numbers you see on this page in the upper left corner in a kind of darker green color. Now, these numbers are much more meaningful than the reported ones. However, they also require some further kind of consideration. The first one is due to the fact that the half exchange rate moved so much, they have appreciated so much during the last year, so year on year. In order to fundamentally understand what's going on in terms of the business performance, it may be better to look at the FX adjusted numbers, which are not affected by the exchange rate changes. So, if we compare the first half of this year to the first half of last year, This adjusted number shows 2% decline, but in an FX adjusted level, without the impact of the exchange rate changes, in fact, profit went up by 4% after tax, year and year, first half. Now, taxes increased quite substantially, and there are two sources of that increase. The bigger one, obviously, is the extra profit tax doubling from last year to this year. In the first half, it's almost 30 billion plus tax. The other country where we are subject to increased taxes is Ukraine. In Ukraine, the corporate tax increased from 25% last year to 50% this year. So therefore, the taxes line, which includes all of these, went up 22%. Now, that leads us to the profit before tax numbers. And on that line, again, FX adjusted, we see 8% growth year on year. That's somewhat better. But even this number includes this kind of one-off burden, which we had to book in the second quarter for the rate cap in Hungary, which has been with us since the beginning of 22, but previously the method applied by the previous government was that in every six months they extended the program with another six more months. So therefore we kind of gradually step-by-step recognized The current situation is that legally there is no end to the rate cap. This we understand as an interim situation because The discussions are ongoing between the government representatives and the Banking Association and our expectation is that eventually this is going to change and they will come up with a solution which creates Thank you very much. There's a fair outcome of this rate cap, which I mean, shouldn't have happened, but it has. And it should be fixed, but it hasn't been done yet. So technically, we had no other choice than booking the full potential loss for the remaining maturity of these loans. And that was the equivalent of 30 billion off and most of this was booked as a risk cost. Now, if he had not had this, then the profit before tax growth compared to last year would have been 11%. So this kind of 11% is more or less what can be considered as a kind of business as usual underlying and the performance improvement. And that looks markedly better than the minus seven or the minus two or the plus four, plus eight, but we can pick your number, but we believe that the 11 is probably the closest to the actual developments. Now, let's have a look at the details of the P&L lines. Again, on this FX adjusted manner, and this is the middle section of this slide. So net interest income year on year has gone up by 19%. That's a pretty solid performance. This is the result of strong organic loan growth. Last year we had 15% and we guided for this year maybe similar level to last year. But the good news is that the first half of the year was 8%. So some acceleration and even within the first The second quarter was stronger than the first. And that means that year on year, to end of June this year, compared to end of June last year, the growth was 17%. Again, FX adjusted. That's long growth volume. And on top of that, net interest margin also improved somewhat compared to last year. And these two together plus, obviously, the strong and even more profitable deposit growth, especially in retail, resulted in almost 20% year-on-year net interest income growth. However, fees and commissions, only 3%, and other net non-interest income, actually negative 21%. So what happened here? Fees and commissions used to grow faster. So what happened on the fees and commission lines? Two reasons. One, the bigger one is that in Russia, fees and commissions actually declined by 17% year-on-year. The other smaller impact came from the fact that we had to delay the legally possible Fees and commission increases in Hungary. You may remember that we were strongly requested to voluntarily delay the fee increases by the previous government somewhere last year, and therefore those kind of annual fee and commission adjustments in retail, which we typically do in Hungary, happened only at the end of June and not in January. This has a small impact. The other line, the other income line, which was actually negative, minus 21, was primarily negative again because of Russia. Russia, this line declined by 32%. So this reflects the declining volume of this transactional business that we have in Russia, which is primarily coming from European corporate clients who make transactions and that's the reason behind margin business. But this is declining in line with the overall decline of trade volumes between Russia and the EU counterparties. So that's a kind of external environmental trend. And this is something we are not going to fight. So this we accept and we are not proactively selling these. So that in a way, this is okay. Maybe some of you might be a bit happy to see that because that shows that our Russian activities actually declining in that sense. And actually our profits are also year on year have started to decline. So that's why the total income growth is only 10%, despite the fact that the net interest income growth year on year is 19%. And that net interest income is obviously the majority of the, I mean, that's the biggest part of the total income. So this 10% is due to these factors which I just explained. Now, operating expenses went up 17%, and this doesn't look very good, to be honest, and we are not very happy about this, that operating expenses went up 17% and income only 10%. Again, despite the fact that actually the core part of income, which is net interest income, grew more than expenses, 19%. But certainly on this expense growth trajectory, we are actively working on this. This is one of the management focuses to slow down this rate of growth. And we are working hard to have a materially lower number for next year. of the operating expenses growth. Okay, so on the right side, you see the ratios which are related to the guidance that we have given, and we decided to change the guidance or modify the guidance in one occasion, and that's the net interest margin. I mean, given that the fact for the first half is 461, and considering all the environmental factors, we believe it is actually quite likely that the net interest margin is going to be higher than last year. But that's probably not a huge surprise to you. All the other lines, we haven't found necessary to modify the guidance, but you can see what where these numbers lead to. Maybe the risk-cost rate requires some further elaboration. As I mentioned, this kind of one-off cost of the interest rate cap extension to maturity, the 30 billion half cost, most of it appeared as a risk cost, as a credit risk cost. and obviously that increased the risk-cost rate and the risk-cost line so without this impact the risk-cost rate the credit without Russia I mean would have been this 42 basis point would have been 21 basis point and that is the without Russia and and the Ukraine and Uzbekistan so this kind of 42 basis points. What you see here is risk-cost rate for the European countries was kind of under the fundamental part was actually only 21 basis points, which is not very different from the reference period last year. Okay, so page four. It just gives more details of the P&L line, so you see the numerical values as well, but I already talked about the most important column, and that is the one somewhere in the middle, showing the year-on-year FX adjusted growth rates. On page five, you can see the technical details Behind this prorated recognition of the extra charges, so if you are interested, what we actually booked and reported for the first half was 173.5 billion yen, actually should, what falls on this first half period, if we kind of evenly distribute was only 75.9. So that's the explanation of this kind of difference. Before we dwell into the details of the performance of the group, let me share with you some Some information and some thoughts regarding the potentially most exciting recent development, and that is that we finally agreed with the owners of Luminor of buying the bank. So we signed an SBA with Blackstone and DMB Bank. And I mean, we are obviously very excited about this. The price, obviously we are not able to disclose anything other than what available is publicly. However, we agreed with the sellers that we can actually share this one information. As you can see here, the purchase price was set below the book value. Again, this is potentially not a new information because DMB Bank already kind of published the expected loss on their investments in their books. And from that, some of the analysts already kind of calculated the price or roughly the price range or something like that. And this is what we can tell about the purchase price with an agreement from the sellers. Now, on our side, the rationale is, well, obviously entering three new markets, which are quite developed Eurozone markets. both in terms of penetration, in terms of income per capita, and in terms of banking services. These markets are very advanced in terms of digital services, and that's part of the excitement what we have. I mean, to be able to compete in such an advanced market. Now, this acquisition We have been saying that we like to be or the optimal position in Central Eastern Europe in the smaller countries is to be number one or number two maximum. Now, Luminor is not number one and number two. But we consider this potential acquisition as creating a growth platform in these countries. and obviously our intention or aim is to challenge the market leaders and that can be done through organic growth, but that also could be done through further acquisitions. So this is obviously something we take into consideration when we look at this transaction strategically. Again, we are not able to share with you insights, but we may go as far as that we find the management team very competent and capable and strong. The current management team and the IT developments with what they have achieved during the last couple of years is also very impressive and there's a A visible result of that, Luminor actually recently came out with a very new, and we consider it very good and very competitive, new mobile app, which we believe will considerably strengthen their ability to compete in the retail segment in the country primarily, in these countries. Now, in the next couple of slides, you can see the kind of publicly available information and the kind of pro forma combination of the assets. So if you were to combine these assets just pro forma at the end of the first quarter, because those are the most current numbers which we have available publicly for Luminor, then it would be like 12% of the total assets, 14% of total loan book and 22% of total loans, so total mortgage loans. So actually mortgages is the strongest part of the Luminar kind of business activity. Also very interesting that if you were to combine with Luminar now, actually the total, I mean, 50% of the loan volumes would be in the Eurozone. And that's, again, this is potentially important from, not just from the kind of primary business, but also from this perspective, maybe for rating and it has kind of wide, potentially positive effects on us. On the following page you see the detailed information on what available is publicly for Luminor and also for the market. You can see from the penetration numbers that indeed these markets and the whole region seem to be more similar to developed Western European Eurozone markets than what we typically have at the moment in our portfolio, and that is reflected in the kind of higher mortgage loan penetration and the much lower consumer loan penetration. I mean, this kind of 3.5% is closer to the most developed Eurozone countries like Germany, Netherlands, and so on. Specifically, Luminar, The return on equity is not particularly strong. I mean, if we look at the last year numbers, 8.6%, this is much less than the comparable two larger and two smaller banks, which you can see on page three at the lower right corner. These are the banks which are active across the region. and directly comparable to Luminor. And Luminor falls behind in terms of return on equity. So why? I mean, again, just from outside in, if you look at the numbers, in terms of net interest margin, they seem to do well. In fact, it's better than the market leaders, but in cost to income ratio, they don't compare very well. And that, I mean, that A not so good performance in some aspect is always a potential opportunity to improve. So this is obviously a theoretical, at this stage, opportunity to maybe improve the profitability ratio of Luminor in the future. Now, page 9 shows the level of digital maturity of the market and the scarcity of branch coverage. As you can see, in all the three countries, Luminor itself has 18 branches only, so it's already primary digital. And again, with this new mobile app, which they just came out, it's called Luminor Bloom, we believe that they will be able to compete even more effectively on the digital front. So that's, I mean, what we can say about the story. Obviously, we have to go through the approval process. And that is going to take some time, given that it's ECB and also the authorities in all three countries which are relevant here. So it is going to be... We hope that the process will be objective and fair and in that scenario we don't see any major roadblock to success. On page 10 we go back to the kind of usual A series of slides, starting with the story in Hungary. So the Hungarian results were even more affected by this one of what I kind of explained. I didn't explain the quarterly decline on the on page three on the group level, but I'm going to do it here because the reason for that came from the Hungarian numbers. I mean, there were two events or two factors here. One, I already talked about, and that's the interest rate cap while we're booked. And again, it was 30.4 billion pre-tax and 26 billion after tax impact. All of this was obviously in the core in Hungary. Plus, on a quarter-to-quarter basis, there was another line which impacted the quarterly difference, and that is on the other income side, the fair value adjustment of the subsidized loans. Now, this is a rather... We have a large and growing portfolio. It's now more than 2 trillion. It's like 2.3 trillion and growing portfolio in Hungary in local currency, in Hungarian forints. I mean, it's getting closer to 5 billion euro equivalent, right? Now we have to fair value adjust this portfolio. And also if there's any kind of swap, Interest rate swap related to this portfolio. Also, those swaps have to be fair value adjusted because we can only do hedge accounting. I mean, I've got to say hedge accounting cannot be done if the underlying asset is actually marked to market on a fair value adjustment basis. So this is a rather big portfolio. And if the yield curves Zoltán Péter Nagy, Zoltán Péter Nagy, Zoltán Péter Nagy, And in Hungary, on top of these two, we also revaluated negatively some investments in subsidiaries, but that only has impact on the numbers in Hungary, on the local numbers. On the consolidated level, they are eliminated, so they don't appear. They actually appear positively because they create a tax shield in Hungary, so the impact of this is actually positive. and so on, because of the tax shield on group level. But the other two obviously appear on the group level as well, the 26 and the 40. And these two were the reason behind the quarterly decline on the group level as well. And they are also the reason behind the quarterly decline on the quarterly level in Hungary. Now, the good news is that in Hungary, despite, I mean, In the first six months, so if you take the six months altogether, then this fair value adjustment of subsidized loans had a very small positive impact, a billion or so. So the good news is that on a kind of year-to-date level, there's not much impact, but on a quarterly level, there is. And the other good news is that actually if you compare the first half to the last year, again this prorated recognition of one-offs, then the increase in Hungary was 15%, even including the cost of the interest rate cap. And that obviously comes from from the improvement in the net interest margin, which you can see here on this slide, and also from the very strong growth in the portfolios. I'm going to talk about that, the growth rates of the loan portfolio and the deposit portfolio, both are very positive in Hungary. Now, one more remark on this slide, the credit, The risk-cost rate in Hungary was 55 basis points in the first half, which is much higher than last year. Now, again, the entire growth here was due to the fact that we booked most of the cost of the interest rate cap prolongation here. If this was not there, if it had not happened, then we would have had one basis point credit risk cost rate in Hungary, so pretty stable portfolio. Okay, a few more details in Hungary, page 11, you can see the The second quarter was just as strong as the first in terms of new applications. And so far we haven't heard about modifications of the conditions. So as far as we understand, the program continues. And as usual, when there's a surge in demand, and especially when the demand is shaped by availability of subsidized programs and subsidized loans are typically more complicated to the process in terms of applications than market-based loans because clients have to approve their eligibility and the structure is usually more complicated it requires more and more skilled interaction with clients. In these situations, typically our market share increases and indeed this happened during the first half of this year. Our market share from new production of mortgage loans went up from this kind of low 30s, which we used to have to close to 40%, which is also something we are quite happy about. The following page shows the other Retail segments and how they fare. Okay, cash flows continue to be strong. The baby loan program continues. Again, we haven't heard about changing conditions. And there's one interesting number here. It's the market share in retail deposit. As you can see, there is some decline in the second quarter. which also shows up in the year-to-date numbers. So we ended the year last year 41.2% and now we went down to 40.4%. Now this is in our understanding due to a technical development that a digital bank which is active in the region started to localize its client base and they switched the IBIN numbers of their Hungarian clients to Hungarian. And apparently, in our understanding, they were actually part of the total market number at the end of 25 and first quarter. which was in fact not quite the case because they were part but with a zero volume. So technically this localization and the deposit volumes of this digital player who has clients in Hungarian clients starts to appear in the overall market numbers technically from most of it at the end of June. We don't know exactly But our understanding is that most of these volumes appear at the end of June, but maybe some part are going to come through in July, maybe August. But certainly by the end of August, we should see the impact on the total market numbers coming from this technical reporting change. and that resulted in this decline. But overall saving market share increased, but that is just main numbers, so that's not true. Okay, corporate, few words in Hungary. And it looks good. Again, we were, Probably one of the very few banks last year who started to grow. And the growth rate even last year was quite strong in large corporate and in micro small. Now, the good news is that the large corporate growth continued into the first half. and the even better news is that micro small accelerated quite substantially. We have 14% growth in six months in micro small corporate loans in Hungary. And as a result of these, our market share continued to increase in terms of loans to Hungarian corporates. And now it reaches 22%. A brief overview of are non-Hungarian operations, so these are the foreign group members or outside Hungary group members. I mean, the overall performance is quite stable, I would say, in terms of profitability. Go more details into volume growth in loans and deposits in the coming slides, but if just looking at the profitability, it's typically stable with some exceptions. So the exception, the biggest improvement we see in Uzbekistan in terms of return on equity compared to last year, and that's due to the fact that the share of consumer loans which have higher margin than other loans increases plus we managed to somewhat optimize the cost of funding, the deposit rates and the cost of deposits and that translated into better margins and that translated into higher earnings. Now on the negative side, we have Russia where we have a trend-like decline in profitability and this is linked to the fact that what I kind of explained at the beginning of the presentation that income, the fee income and other income lines decline in Russia in line with the decline of these overall activities, these transactional activities of our primarily European corporate client base. We also have decline in case of Ukraine, but that is not at all related to the business performance. As you can see, return on equity went down from the kind of high 20s to 17%. But that's due to the fact that the corporate tax doubled. So last year we had 25%, this year 50%. And even with 50% corporate tax rate, we made 17%, which is kind of okay. The other kind of smaller magnitude decline happened in Serbia. In Serbia, there's not as drastic, but there's also a kind of rate cap and so on. Now, going back to the kind of cross-section slides, maybe one briefly looking at the margins. So there was not much but three basis point improvement, at least it's positive, quarter and quarter in the net interest margin. And you see the biggest components of that. So Hungary was unusually in this period negative, but the reason behind that was not that, I mean, product level margins declined, It was because there is a surge in the overall total assets. So the denominator 6% growth quarter and quarter on the balance sheet and that came primarily from intergroup placements. So placements of the subsidiaries in Hungary increased quite substantially and that's obviously a close to zero margin and also corporate deposits have quite a surge and that also a relatively low margin liability side product, especially compared to retail. And so this kind of composition impact in Hungary. Uzbekistan was positive, and the other four basis points came from, again, composition, so the lower margin countries had lower growth, and the higher margin countries had higher growth. Rate sensitivity to the euro rate and half rate, they have not changed much, so 120 million per one percentage point to the euro, and 23 billion half per one percentage point to the half rate. Looking at volume dynamics, we are quite happy to see this slide. Slide again, 8% growth in six months, and the quarterly increase was 5%. So there's acceleration in the growth rate compared to the first quarter. And you can see the particularly high performance, highest Ukraine. In Ukraine, we started to, I think this shows our commitment to the country and and I believe that business can be done profitably even in this environment. And we also consider this as an investment into the future of the country. Obviously the biggest countries, Hungary, Bulgaria did very well, double digit growth in six months. And in Bulgaria, this is the kind of post Eurozone recession impact. And in Hungary, this is primarily fueled by the housing loan subsidized program, 17% growth in the first half, in six months in mortgages in Hungary, right? Now the only kind of laggard here is Uzbekistan. So I showed you that in terms of profitability, Uzbekistan in particular already started to improve. But in terms of growth, they are not there yet. Now the new development here is that we changed the CEO. So we have a new CEO who is a Hungarian gentleman who joined In 2005, I guess, to my team in finance, and he's a very seasoned and very good manager. He has been the CFO, the Chief Financial Officer of the Ipoteca since we acquired it. So he's taking over the leadership of the bank and we Especially personally me, I believe that this is going to give the right boost to the performance. And I personally expect visible improvements over the course of even the next six months compared to what we have achieved so far. Deposits. Year to date, 6%, again, strong. especially strong in Hungarian retail and in Bulgarian retail, which are very profitable. I mean, these are potentially the most profitable products across the group, so that is certainly very important. So overall, good picture. Orderly numbers, I'm not going to Well, our kind of detail, but again, I think the headline is that 5% for six months, loan growth was 8%, second quarter was 5%, so there's some acceleration in the growth rate that we have seen. In terms of portfolio quality, stable, coverage also stable, and again, the risk-cost rate, The second quarter was higher, but that was due to the fact that we booked this one-off charge for the rate cap as a risk cost, most of it. In terms of capital position, 17.6% Tier 1 ratio. You can see that it's strong. You can see the year-to-date development of the of the factors and the decomposition. So the kind of profit, the normalized profit generated 1.9 percentage points, common equity tier one percentage point, tier one equivalent. So that shows the capital generation potential. Yeah. In turn, I mean, is it high? Is it low? 17.6? Yeah, you may. I'm sure there will be questions about this. I mean, we believe that this 17.6 is somewhat higher than the optimal, if you believe that the optimal is that we want to be at the kind of one of the strongest in this pack, in this group of and other comparable banks. And now we seem to be quite at the kind of an outlier in the higher end. I mean, Raiffeisen obviously, because of the large exposure in some high-risk countries, they may not be the best benchmark here. But the good news is that we found the solution and we hope that we, not just hope, we believe we found the solution which actually creates value for shareholders and that is an acquisition for the Luminor acquisition. We believe we'll bring this ratio to this range what we kind of target compared to these banks. In terms of liquidity, I mean, liquidity remains stable, loan to deposit ratio 78% liquidity coverage ratio above 200% and stable funding above 150%. And in the second quarter, we made a benchmark tier two, and now we move the benchmark up from 500 to million to 1 billion. So this was our largest ever issuance and we considered it quite successful. So that further strengthened not just our capital but also our liquidity position as well. Having said that, we are still not very much levered. The leverage is quite low. So if you look at the total wholesale debt, to total assets, it's 8%, which we consider still quite low. We were, I mean, in 2008, when the global financial crisis hit us and hit us hard, that was actually 25%. So this is, we consider comparatively low still. There hasn't been much movement on the rating. However, we are potentially optimistic in terms of the future coming from two factors. One, that the economic policy of the newly elected government in Hungary are obviously, we believe, rating friendly. So obviously, they also have to deliver and not just are all set targets and policy frameworks, but a good framework is important. Delivery is even more important, but that makes us optimistic in terms of potential future rating developments. And the other factor is, I mean, obviously buying an asset in three Eurozone countries, with a better rating than ours should have a positive impact on this consideration as well. Another outside-in perspective on us. I mean, I'm sure it's not a big thing for you because you are investing in many very successful large global companies. But for us, it was actually quite important that our ranking in the Forbes Global 2000 improved considerably. And now we are in part of the elite group of top 400 entities, corporate entities. So that's... That's something we are quite happy about. And then some more kind of self-marketing slides. There's not much change on this page 26, 27. We have seen these. We continue with green landings on 28. You can see, you may remember that we set this target to reach 1.5%. Zoltán Péter Nagy, Zoltán Péter Nagy, Zoltán Péter Nagy, Zoltán Péter Nagy, Zoltán Péter Nagy, to 5 billion euro. Now, maybe a few words about expectations. In terms of macro, I mean, there's volatility. I'm sure you are also very much subject to coming from the war in Iran and the strategy, the US strategies regarding that difficult situation. And so therefore, expectations are volatile so to say but if you put that as and plus it's uh this the heat and the drought uh and the uh and the scarcity of water uh is actually it's it's the it's a current issue in Hungary but uh nevertheless we believe that it's not going to have a major material impact on the overall kind of We have had a couple of years when Southern Europe, the Mediterranean, has done better and Central or Northern Europe has done somewhat better. Zoltán Péter Nagy, Imre Bertalan and others. In terms of guidance we decided to modify some of the guidance in one respect regarding the net interest margin. Again, I think now we can reasonably safely predict that the net interest margin this year is going to be higher, exceed last year and not just to be around it. On all the other lines, we keep the previous guidance and you can judge yourself whether the risks are up were down on those lines. There's a bunch of other cross-section slides going through each line of the balance sheet, the P&L, sorry. So if you have interest or if your questions will target them, I'm going to talk about part of the formal presentation. So I've finished here and I'd like to ask you to ask your excellent questions.

Thank you, ladies and gentlemen. We will now proceed with the question and answer session. If you wish to ask a question, please use the raise hand icon to indicate or press star 9 on your phone's dial pad. The first question is from Gulnara Saitkulova, Morgan Stanley.

Hi, good afternoon. Thank you for taking my questions. When it comes to Luminar, where do you see the greatest opportunities to create value under your ownership? At the same time, what do you see as the key execution risks associated with the acquisition, both in terms of integrating the business and operating in the market where OTP has not previously had a presence? And you mentioned that you aim to become number one or number two in the Baltic market. However, the Baltic banking market is highly competitive. There are well-established Nordic incumbents as well as digital challengers such as Revolut. What do you see as OTPs and Luminor's key competitive advantages in this market? And how do you plan to strengthen Luminor's competitive position over the medium term? In addition, on the slide eight, you highlighted that Luminor's cost-to-income ratio is materially higher than that of the Baltic peers. What are the main operational levers you intend to pull to improve the efficiency and narrow this gap? Do you think this will require material upfront investment from your side? And are there any areas of the business of Luminar where you can see scope for improvement or the profitability? Thank you.

Wow, that was a very detailed question.

Now,

Well, what I said exactly was that we would like to challenge the market leaders. And if you look at the numbers, they have 12% market share across the Baltics. In terms of loan, the number two player has 21. So that's quite a big gap. And as an aspiration, this gap should be closed, or at least I mean, what else would be a target to buy a bank than to grow it, right? And again, I don't think it's a secret that we may look into other acquisition opportunities in these markets to strengthen the position of Lumino through acquisition. It's typically not easy to grow through market shares organically. That's usually a very costly exercise. Nevertheless, possible. Now, all of your other questions, I have answers to more or less, or we have strong views on those, but I don't think I'm able to share with you. I mean, we have a non-disclosure agreement, so I cannot tell you anything where the information comes from other than publicly available sources. So at this stage, I won't be able to have an answer. because operational levers and so on and so on, and how to improve the cost to income ratio, I would mean to share with you information which I'm not allowed to do, right? So this is, so therefore, I think we have to, in terms of communication, we have to remain on that level. So if you go to page eight, I think it's very clear that there's an opportunity. If bigger banks and even smaller banks can operate with a much lower cost-to-income ratio, then there may be an opportunity to improve this. But I'm not in a position to share with you where, if at all, we see opportunities, right? Because we have not closed the transaction. And in terms of risk of integrating the bank, I don't see, I mean, we have done these, I mean, we acquired 14 banks in the last 12 years and many of them were in new markets and some of them were much, much less developed in terms of the market where they operate, in terms of the supervisory environment they operate, and in terms of their operations or management. So I think the risk of integrating Luminor to OTP Group is much less than the risk what we have faced in most of the cases during the last 12 years throughout this 14 acquisitions either because the country and the the entity was less developed or and or because we actually had to merge entities there's no merger here right so it's just uh we only have to include it into into our our kind of group uh activities the plus again i think this is You may consider this sensitive, but maybe not because you know the names as well of the management team. We consider the management team quite strong. So we consider this as low risk in terms of integration to the group. And I'm sorry, I'm just not in a position to answer your very detailed and very pertinent questions, I must say. Indeed, these are the right questions to ask. And these were the questions what we asked ourselves when we did the due diligence and when we did the modeling of the expected financial performance.

That's fair. Thank you very much.

Thank you.

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

Hello, can I please follow up on Luminor? I think the way you phrased it that you were hoping for a fair and objective Approval process here. How concerned are you that this may not be a case? I mean, some of your approval processes in previous seminars, ideas like Slovenia, I think dragged on for quite some time. We saw some press reports. about OTP's Russian exposure coming up, so your views on this would be interesting. Secondly, on your point of high or advanced digital adoption in the Baltic markets, what is your point here? Does this mean that you might actually not have too many low-hanging fruits to save on costs? Would this mean that the rest of the organization can potentially learn from the more digitally advanced Baltic operations? Or could this mean that, like, how do you think about the physical branch, the physical network of 18 branches? Is this the optimal level? Your thoughts on that would be helpful. And then finally, on the Home Start program and Hungarian loan growth topic, What are your latest thoughts about the sustainable growth rate here? I think you mentioned on a previous call when we spoke about it that mortgages could potentially grow at a double-digit rate even without the subsidies, but it would be interesting to hear your thoughts. To what extent are we seeing a front-loading of demand ahead of the market potentially moving to standard rates? Thank you.

In terms of the approval process, indeed, it's a very, I mean, put it this way, the nature of OTP group is somewhat politically sensitive in the Baltics. And we have to, I mean, we openly acknowledge that sensitivity and take it very seriously. So I think we have to put effort into transparently communicate what we do, how we do it, and why it should not be a problem for any of the Baltic countries. And somehow communicate the OTP story, our strengths, What we have achieved, what we typically bring to a country and what we could bring to Luminor and also our commitment and dedication in supporting Ukraine and taking the risk there and being potentially the most active non-local banks in terms of growth rate and everything. So I think we have to make a good effort to to create a transparent and fair view of the group and somehow focus on the facts and the objective parts of the story. We cannot and we don't want to be kind of politically involved, but as we have seen, across Europe, cross-border acquisitions can develop into local, can become part of local political discussions or agendas, right? In case of much bigger countries, we have seen that happening, right? And that's, I think this is unfortunate in Europe. This is not healthy for Europe. But this, This is there, we have to take it seriously and we will take it seriously. Obviously we have consulted with the local supervisors and with ECB prior to this transaction and also these discussions made us believe that objectively that doesn't seem to be any potential big roadblock to a transaction. But nevertheless, it will take time and we have to manage this process or contribute to this process as much as we can. I think this is what I can say at this stage. In terms of the nature of digital development and why I think it's good, because you are as strong as your Competitors make you, right? You get better and stronger by competing with better and stronger competitors. Actually, it would be a potential mistake to stay out of one of the most developed markets digitally in Europe, because then you are not part of the real happening, right? And yes, I mean, I'm sure we will learn from these markets and which learning which we can apply in some other parts of the group. But I also believe that we can contribute from a quite broad experience what we have in terms of different geographies and market situations and potential developments. The HomeStart program, I mean, I think the first question, I mean, your question was very good, but even more exciting question I think is how long this is going to continue. And so far we don't see the end of it. So we haven't heard any, plans to change the structure or the level of subsidy or whatever. So this is certainly, as far as we can tell, this continues. And obviously, the longer it continues, well, there will be to, I mean, if, I mean, we take this commitment by the government to join the Eurozone seriously. The timeline, what they said was quite short. In three In four years, so by 2030, they want to be ready to join the Eurozone. And that means that that assumes a quite rapid fulfillment of criterias and normalization of the rate environment quite rapidly. And that means that the difference between the The kind of subsidized rate, which is kind of maximum 3% for clients and the market rate is going to be less and less different. Therefore, as we go along in the future, I mean, go more into the future, the difference should be less and less between the subsidized and the market rate. So in this sense, I mean, that means that the attractiveness of the program, if it doesn't change, is going to diminish because this relative attractiveness is going to be less and less and the potential negative impact should the program end or be substantially changed be less and less. But I think it's still reasonable to assume if they're in a kind of business as usual environment, we should be in a kind of lower teens, I mean, around 10-15%. Having said that, if we look at what happened in Bulgaria, closer to joining the Eurozone, and after joining the Eurozone, I mean, we have very strong Lone Dynamics. We have had like two, three years of more than 20% growth in Bulgarian mortgages. And we are still, I mean, year on year, we have 35% as fast as Hungary, right? Now, Bulgarian mortgages are special because they're the benchmark is the deposit rate, and that's Zoltán Péter Nagy, Imre Bertalan If we believe in this accession scenario, policy scenario, then maybe even without this subsidized structure in a few years, we can get to 20 plus percent. I mean, that's what the experience in Bulgaria suggests, right?

We'll see.

But for us the more immediate question is that how long is it going to continue? And that we don't know. I mean the current subsidized structure.

Yeah, fair enough. Thank you for all the color, Laszlo.

Thank you.

Thank you. The next question is from Alex Kantarovics, Römer Capital.

Édes Baba.

Alex, the floor is open. Please unmute your microphone.

Yes, can you hear me? Yes. Yes, my apologies. I would like to ask about the Russian situation. You mentioned declining profitability, but I want to check if the bank in Russia handles oil and gas payments from Western Europe to Russia, if you can give some color on this. And the broader question is, what are your expectations about resumption of upstreaming of dividends from Russia?

Thank you. As we have been clear about this, we do cross-border transfers between European counterparties and Russian counterparties, or counterparties in Russia and European counterparties, typically serving our clients in Europe and corporate clients in Russia, within the framework of the sanction rulings and rules and being extremely focused and rigorous on compliance. I mean, exactly what clients and what details I probably should not go into more details than this, but strategically by far the first and most important target is or goal is to fully comply and especially to the sanction regulations. So everything what we do is within the context of of detailed sanction regulations. And whenever there's a potentially sensitive transaction, we do consult with the relevant authorities. I mean, outside Russia. So that's what I can say on this. Dividend upstreaming. We will submit an application for dividend payments based on the first half results and we are hopeful that they will be approved and we can resume the dividend payments. So we are going to try. I hope silence means sufficient answer. So maybe we can go to the next one.

Yes. The next question is from an attendee joined via phone. I open the line. You will receive an automatic message about it. Please unmute your microphone. Press star six. May I ask the name and the company, please?

Hi, good afternoon. It's Jovan Sikimic from Odobecev. Thanks for taking my questions. I was just interested in what about, let's say, your earlier thoughts on expanding the footprint in Central Asia, if it's still valid. And after the Lumino deal, probably will not take as much capital as initially thought. Can you give us a bit of an update about capital returns going forward? I mean, in terms of potential new share buyback this year.

Thanks a lot. The attractiveness of Central Asia has not changed. We continue to consider the region attractive and we continue to look into every meaningful opportunity. in the region, sure. But that's not a guarantee obviously for any new event or transaction, but our interest remains and we are going to continue to monitor these markets and seriously consider opportunities if they come up. In terms of capital returns, I mean, as our approach to share buybacks have not changed, so we announce them when we receive an approval from our supervisor. And I think it's fair to say that we are going to submit application, but I'm not As usual, we are not telling that how much and when, only when, only at the time, only on the day when we receive the regulatory approval. In terms of, I mean, the other part of capital return is dividend, obviously. I think I can say as much as that this acquisition does not change our dividend. Aspirations, so to say, or views on how much dividends we intend to suggest to pay. Having said that, we don't have a formal dividend payment policy and the payout ratio target, but I think it's fair to share with you that our internal thinking and discussions, this Lumino transaction does not change. How we think about future dividend payments.

Of course, of course. Thanks a lot. And maybe if I may add another one. Maybe your thoughts or insights, if there's something changed recently in terms of how do you see windfall tax development in Hungary by the new government?

Very, very relevant question indeed. We expect The windfall attacks to start to decline next year and then potentially gradually go down to zero. This was an extraordinary measure for a situation which was claimed to be extraordinary. I mean, the magnitude is huge. It was just doubled last year without any So it's just... We believe that if the government seriously considers kind of converging with more developed countries in Europe in terms of their economic performance and in terms of their institutional and business environment, then these sector tactics and with this magnitude are out of the question. So they have to... And this is not just a banking tax. I mean, there are many other sectors in Hungary which have been heavily specifically taxed. And this is extremely distorting and very negative for long-term development of the country. Obviously, there are short-term fiscal constraints. We acknowledge them. So we didn't expect anything for this year. May we expect the government to make a commitment during the course of this fall? Because somewhere in October, they will publish the budget for next year, but even more interestingly, the convergence plan, which is a three-year fiscal plan, which they have to submit to the EU. And that three-year convergence plan We pretty much expect to see a gradual phasing out of the, at least the winter protection. And now I'm sure there will be, I mean, now it's August and very warm, but I'm sure that starting from September, there will be discussions between the The Banking Association and the government on this, and I hope these are going to be fruitful and positive. But, I mean, obviously these are not our decisions. I think we have very strong arguments, but we'll see.

Okay, thanks a lot, Laszlo. Appreciate it.

Thank you. The next question is from Nis Csita, HSBC Asset Management. Nis, the floor is open, so you can start. Nis, we can still, yes.

No, that was me, Laszlo, so I don't seem to hear Nis.

Okay, so let's move to the next question. If you wish to ask a question, please use raise hand icon to indicate or press star 9 on your phone's dial pad. Yes, the next question is from Valentina Stojkova.

Yes, hi, good afternoon, can you hear me?

Yes, loud and clear, yes.

Oh, wonderful, thanks a lot for the presentation. I have a few questions on Hypotheca Uzbekistan. So, you mentioned that loan growth in H1 was mainly due to consumer loans, so I was wondering how do you see cost of risk, NPR ratios, migration from stage 2 to stage 3 developing into the end of the year and also, I don't know whether you can comment on your expectations for next year as well? And then this leads me to my next question, which is mainly on the growth strategy for IPOTECA. I was just wondering, where do you see the main opportunities, given there is quite intense competition in the corporate lending and various gaps on retail loans? And then my last question is, when do you expect OTP to buy the remaining stake of the government? Shall we expect any dividend distribution from this year's earnings?

In the first six months, the consumer loan, which in our case is just cash loan, typically given to payroll clients who have officially declared income, was 8%. Now, this segment contributes to maybe 20-25% of the growth in the total market of unsecured lending or lending type activities. So our problem so far has been that we have been targeting only a small segment of the total unsecured lending, so to say, in the country. Now the good side of that is that our risk profile is actually quite good and profitability is good and the portfolio quality is good. But we are falling behind in terms of growth. So we are not capturing the full opportunity from the market growth because we are not targeting the whole market. We are targeting just the sub-segment which is a lower risk, lower return segment. So I think it has been okay that we have done this because it's learning and we don't want to do reckless lending and until the IT environment was not there and until we didn't have enough data and understanding of the market and until the management was not solid enough to kind of start to potentially penetrate riskier segments and higher growth segments, It has been okay, but now we have to broaden our scope and our aim. So the acceleration I primarily expect in consumer lending or in non-collateralized, non-mortgage retail, right? which actually includes car lending in that sense. So it's non-mortgage. But even a mortgage, we should do better. Corporate is tricky. So the potential is big, volumes are big, but our comfort level is still not very strong to start meaningful level of corporate lending. However, we should do more because now this volume has been declining and it keeps declining. As you can see, this is too conservative. And this is not the strategy. So there should be some moderate corporate long growth as opposed to decline. But we are not going to kind of... because in corporate, you could do very big deals, right? I mean, volume-wise, you could grow very fast, but that we don't want to do, but decline is also not something we want. So this is, we have to fix this. So the corporate lending we have to, and the corporate business line we have to fix. So we have two potential areas to expand. One is the non-cash loan, Part of the unsecured retail lending. The non-payroll. And that's a big part of the population. And now we believe that we have enough understanding and enough IT capacity and people to do better and try to penetrate that part of the market, which is the bigger part, actually, than what we have been talking so far. And the other one is to do better in corporate, but that doesn't mean that we want to blow up the corporate volumes, but there should be some moderate growth, cautious actions to slowly build up that presence. as opposed to just kind of precipitous decline what we have seen during the last three years. Dividend, yes. Yes, yes, yes. We seem to be able to pay dividends this year after last year results. And that's quite good actually. And And yes, we are in discussions with the government to conclude the buying of the remaining part. And we hope to make a deal which is going to be beneficial to both sides and make both sides happy. Because obviously, we have a strong interest to be in a good partnership, in a good relationship

The next question is from an attendee joined by a phone. I open the line. You will receive an automatic message about it. I have opened the line, so please press star six on your phone's dial pad. Let's move forward. Let's take another try. Nisht Chita, HSBC Asset Management. I have opened the floor. Please unmute your microphone.

Hello? Yes, now we hear you.

Hi there. Actually, there must be some kind of a confusion. This is Nick Dimitrov, Morgan Stanley Investment Management. Hi Laszlo, I just have a quick question, actually a couple of questions. The first one is, I know previously you've said on earnings calls that if there is a larger acquisition, you're going to look to optimize the capital structure and potentially issue an ATO1. So I was wondering whether Luminor qualifies as a large enough transaction. So that is the first question. The second one is, There's been another transaction that I think has fallen under the radar a little bit because everybody's so focused on Luminor. But there is a bank in Latin America, in Paraguay specifically, called Banqueno. And I noticed that you increased your stake from 6.6% to 10% in May. So I'm kind of curious about... First, I was very surprised when I saw it, to be honest, because it's not your natural footprint, right? And I was kind of wondering what is the long-term intention there? And I guess my last question is, so you have different M&A opportunities and you opted out for Luminor, but when you look at kind of Central Asia and the Baltics and you did say this yourself that the Baltics are very advanced and blah, blah, blah, blah. So when it comes down to growth, it could be limited. And what was it in the case of Luminor that kind of attracted your attention to kind of pivot away from Central Asia, which has been talked about previously, and kind of focus back on the Baltics? Thank you. Okay.

Well, it's a large acquisition. This is the largest acquisition we've ever made. So in that sense, it's large. Is it big enough for us to issue an AT1? No. So it's large from our perspective, but not as large to qualify for an AT1. Ueno is very exciting. It's a story, I mean, we are obviously biased because we invested, but we really like the story. And we, it started as a purely financial investment, but we started to talk with the management and go there and they came and so it's, we very much like the story. It's a digital bank, it's a digital Challenger, growing very fast, 23% are, they actually, they have public reports, so they list, I mean, so you can look at their numbers and their story. I think it's first looking at 23% ROE in the phase when they are growing very fast. They have an amazing client relationship market share in the country. They are very strong in payments. It can develop into a story beyond even the country. So we really like that story. And the more we know, the more we like it. but it's still, it's a pure, it's a financial investment, right? It's a financial investment and there's no immediate intention to go beyond 10%. We could consider if they wanted to, but it is, we are not the strategic investors. It's financial, we don't, we are not involved in managing the business, but It also opened a window for us to look into a very different continent from a very exciting, digital, successful perspective. And that perspective is actually quite fascinating. So we are quite happy financially that we made the investment, and we are quite happy that we have this window to be able to look into the Latin American from a purely digital challenger perspective. That's where we are. The Baltics, we don't pose this question as either or, Baltics versus Central Asia. It's not that we lost interest in Central Asia or in any other potential market where we could grow. I mean, including the footprint where we are present at the moment. So the fact that we decided to buy Lumino doesn't mean that we neglect all other opportunities which come up. It's just that this time what we saw in Luminor and the deal, what we agreed, we believe that this is attractive. We create value and we see the upside. And I mean, if you show this page eight, we go back. I don't think it's difficult to see The opportunity in the Baltics, right? Because if out of the top five banks in the Baltics, I mean, we have one, I mean, the ROE is 15.318, the two bigger banks, and the two smaller banks, 19 and 14.6. And these are developed Eurozone markets with the Eurozone cost of capital. We find these markets attractive. And I think this is objectively is attractive. And so that's the Luminar decision, right? So it's just, we believe we made a good deal. But that doesn't mean that we lose focus or attention on all the other opportunities which may come up in other parts of the world. So we, and again, I mean, between 14 and 24, 23, sorry. So in nine years, we acquired 14 banks. So that's the kind of speed of acquisitions and acquisitions we are kind of used to. Not doing anything worse for three years was rather strange. Now at least we have one transaction, but there's no reason not to have more. Actually, we would love to have more. But obviously that is only going to happen if we can have a deal where we believe that we create value. So it may not happen, but we keep trying. We continue to keep trying.

Thank you so much. If you wish to ask a question, please use the raise hand icon to indicate or press star 9 on your phone's dial pad. As there are no further questions, I hand back to the speaker.

So thank you very much for joining us today, listening to the presentations, and thank you for your very pertinent questions as well. I hope to see you personally. We are going to the US. We are going to the UK. We are going to be as active as usual. Our CEO, Peter Csanyi, will join us in the US to meet investors there on the two events in early September. So you can see us there. And as always, we are at your service. But anyway, I wish you a very good rest of the summer. I hope you will have more time to relax and prepare for the second half of the year, the rest of the year, and wish you all the best and goodbye.

Thank you for your participation. The conference is closed now. Goodbye.