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.