This meeting is being recorded.
Dear ladies and gentlemen, welcome to the OTP first quarter 2023 conference call. This conference will be recorded. As a reminder, during the presentation, all participants will be in a listen-only mode. After the presentation, there will be an opportunity to ask questions. May I now hand you over to László Bencsik, Chief Financial and Strategic Officer. László, please go ahead.
Thank you. Good morning or good afternoon, depending where you are, thank you for joining us today for this conf call. The presentation is available on the website and during the conf call, I'm going through it, so you can also follow it online or in a printed copy if you have any. As usual, I will give a kind of short presentation. I promise it's going to be short then a Q&A session follows. Maybe if you start on page two. I mean, the after-tax profit of the first quarter was a historic high. We have never, ever had such a strong quarterly result. Obviously, this was in a big way affected by one-offs. We had one-offs which actually canceled each other out.
We accounted for in the first quarter for the usual bank tax, which was introduced in 2010, and the windfall tax, the recent one, according to the kind of original methodology just applied for last year. That's HUF 24 billion and HUF 61 billion, so altogether HUF 88 billion. We also had a positive effect, and that's coming from the NKBM acquisition. There's a badwill and an initial risk cost, and the sum of these is basically this green line here, HUF 85 billion. It almost cancels out the financial taxes, the special taxes, for the first quarter. We had one more positive one-off. You might remember last year, there was the default and the resolution of Sberbank Group, including Sberbank Hungary.
We booked the loss last year, but that loss did not manifest, so we reversed that booking in the first quarter this year. There's not much difference between the adjusted and the after-tax profit. Actually, the adjusted is somewhat lower. ROE terms, we do rather well, I mean, in kind of low 20s territory, which is arguably better than what we originally indicated, namely around last year level, which was 18.6%. The first quarter has so far been, I mean, better than our original expectations. Going forward, looking at the P&L, there are some factors which you have to keep in mind when you look at our data. First of all, we consolidated NKBM starting from February. February, March includes NKBM, the Slovenian bank.
There has been quite strong movements in the exchange rates, the HUF-EUR rate and HUF-RUB rate . In order to get a kind of full picture, you probably have to look at this without NKBM FX adjusted numbers, which is the column, the second column from the right. As you can see, I mean, total income went up 3% quarter-on-quarter. Costs were flat and operating profit improved 5% in one quarter. Obviously, the risk cost was the biggest mover of the results. It was much lower in the first quarter than in the fourth quarter last year. Pretty much the portfolio across the group has been stable and even Russia, Ukraine, where we booked larger provisions last year, seem to be doing well in terms of portfolio quality.
There was really no need for further provisioning. On this slide, you can see the net interest margin, which is probably the most kind of interesting or worth looking at feature of our quarterly report. There will be a slide where we detail entity by entity the NIM developments, but overall, the group level increased from 3.5% to 3.66%. Cost-to-income ratio remained below 50%, but slightly increased compared to the average of last year. Looking at the Hungarian performance, it's not as good for Rosie as the consolidated one. As you can see, adjusted profit went down year-on-year quite considerably. This is purely due to not purely because also cost increased and margin contracted. This actually resulted in this squeeze of profits in Hungary.
Quarter-on-quarter, we had some improvement, but that's more like kind of seasonal cost year-end plus lower risk cost. ROE, not very high, but, I mean, this is obviously somewhat distorted because here the balance sheet includes all the investments in the subsidiaries. That has some implications for capital as well. Anyway, this is the calculated ROEs. Here you can see the one-offs which manifested on the standalone or kind of core sub-consolidated level. One important factor here, the bad will does not appear at this level. The bad will only appears on the consolidated level. That's why actually without dividends received, the core business was negative, HUF 37 billion negative in the first quarter because we booked the special taxes, but not the bad will here.
Turning to the other countries and, first of all, I think very important you see the NKBM contribution, 13 billion HUF equivalent for two months, in terms of profit after tax. Bulgaria somewhat declined, that's due to one factor. We had to book all the regulatory charges related to deposit protection in the first quarter in Bulgaria, and also in SKB and in Croatia, but for smaller amounts. That in Bulgaria, that resulted in a 9 billion increase of cost compared to the previous run rate. If we adjusted that, the profit was almost as much as in the fourth quarter last year.
Again, strong Slovenian performance, including the new acquisition, This is obviously going to further increase in terms of its impact in the second quarter, around all three months of the given quarter will be accounted for. In Croatia, Serbia growing fast, Slovenia, Montenegro doing well, also Moldova, surprisingly, given the situation there. It's Ukraine and Russia, very strong and stable earnings. The operating environment in both countries kind of stabilized, and therefore it allows this level of profitability. Again, portfolio qualities seem to be stable as well. Now, Romania is the only country here where we could not reach the required level of profitability and the required level of size. There was even some decline quarter-on-quarter.
I mean, if you look at the efficiency indicators, they obviously improved a lot, but that's due to the NIM expansion and more, more about that later on. If we turn the page, there's some further detail on Russia, Ukraine as usual. Again, there's no major change in the situation in neither countries, but probably worth noting is the coverage level. Even with this strong 13 billion HUF equivalent profit and more than 40% return on equity in the first quarter, we managed to increase coverage close to 15%. This is provisions over total loans, total gross loans. That's the kind of gross provision coverage, which is quite strong.
In terms of the kind of liquidation impact on the ratios and the capital ratios, there's again, not much difference between the fourth quarter last year. Russia contracted somewhat. We have the increasing kind of retained earnings and accuracy, which is a potential loss if we have to deconsolidate. At the same time, kind of, the other factor here is the exchange rate, which is important. The ruble started to weaken, and that actually reduced this number. In fact, the ruble rate has a potential impact on the overall pro level of ratios or capital ratios on a consolidated level.
This is something to watch because if the ruble weakens, then it has a negative impact on our consolidated group level Common Equity Tier 1 and this kind of negative impact in terms of, in case of the consolidation then reduces. There's some dynamics there. Ukraine, it increased to decreased to five basis points of potential loss. Again, that's due to the earnings which are retained there. Now the first quarter was characterized by the consolidation of NKBM. In fact, the work started there to merge the entity. It usually takes one and a half years for us to fully consolidate an entity and fully merge in case we have two entities in a country.
We can expect the merger to conclude somewhere third quarter next year. If we go to the Uzbekistan story, this is the one coming. After NKBM Slovenia second quarter, we expect to close Uzbekistan deal with the Ipoteka-bank . I mean, we have talked about this before, and it's, it has close to 8% overall market share, 30% market share in mortgage lending. Is the 5th largest bank, state-owned bank, the first in the line of privatization. In terms of earning potential, as you can see, these are kind of latest published data. The average in the first half last year, 17 billion equivalent. That's the kind of run rate of profitability for six months period.
At least this much should be the contribution from Ipoteka Bank for the second half of this year, should the transaction close, which we expect to be so. Looking at Ipoteka Bank numbers, I think there's one kind of unique feature, and that is the quite high loan-to-deposit ratio. It doesn't mean that we have to kind of refinance the entity with large third-party loans. It's basically the mortgage lending is to a large extent done by funding from various state organizations, and at a preferential rate. That means that, I mean, and therefore, the mortgages are somewhat in a subsidized level of interest. It's kind of this kind of large interbank liabilities. That's the line where all these factors come in.
Should we buy the entity, which we will, there's only a small amount which we have to refinance, less than $50 million equivalent. The price we have not made public, but we alluded to the potential size of it in the updated guidance, because we say that roughly EUR 200 million one of positive can appear in the second quarter related to the transaction if it closes. That again is a combination of first year risk cost and mostly badwills. We're buying the entity with a hefty badwill. At least that's the original data suggesting results. On page eight, as total income, here I mean, if you follow, looking at the kind of quarter and quarter column, it's it can be somewhat confusing.
I try to explain the meaning of the different colors and numbers. Basically, the gray one are the ones which are related to the NKBM transaction. Total income line was impacted by 23 billion income from NKBM, February and March. If you look at the kind of quarter-over-quarter change in total income, then the nominal change was six. Out of this 23 billion was the impact of NKBM. Without NKBM, the nominal change, which has been 17 minus. If we also adjust with the FX rate, then you get the number, the second number in the last column on the right. It is 3%. Without NKBM and FX adjusted, overall income increased by 3%. That's the kind of most meaningful number.
Wherever we have two numbers, the second one is the FX adjusted. The similar logic is followed in the following slides. Maybe some bits of a deep dive into net interest income. NKBM contribution was 18 billion to net interest income. In terms of movement, I mean, looking at the FX adjusted number quarter-on-quarter, there was quite some improvement in 17% up in Bulgaria, 18% up in Slovenia, excluding NKBM growth and Croatia at 10%. Kind of double-digit growth in net interest income on a quarter-to-quarter level. Even Russia improved and even Ukraine improved somewhat. Now the only exception is Hungary, where we have a kind of flattish net interest income dynamics.
The explanation comes on the following slide. You can see the net interest margins. Again, Hungary was flat or margin was flat. This is basically a combination of very little growth and the fact that we have this strong overweight of fixed interest-Assets in the balance sheet and therefore, the increase in the rate environment has a negative impact during the course of 2022. There was not much rate change between the fourth quarter and the first quarter. We had some increase in corporate loan NII, and that provided a small improvement here in terms of three basis points, but it's rather flat.
Unfortunately, the expectation here is that the second quarter might be worse or will be worse because the change the compulsory reserves, the amount increased from 5% to 10%, what we have to put into reserves. The rate, I mean, changed in a way that for one quarter of it, we don't pay anything. The effective rate on this 10% requirement is 9.75%. Sorry. Which compares to the 18% reference rate. We are losing more than 8% on these reserves. That new reserve requirement regulation came into force from April from the second quarter. The second quarter will probably be even lower in Hungary.
Starting from this third, fourth quarter, hopefully we will see a fast normalization of the rate environment in the and certainly for the second half of the year, we expect rather rapid cut of the reference rate, and then hopefully this will induce improvement in the Hungarian NIM. From our perspective, we actually expect the first cut to happen in May because today the new inflation data came out and it's 24%. Finally, it started to visibly decrease, and hopefully the central bank will react to it by cutting the rates, starting the rate cutting exercise.
In all the other countries, as you can see, net interest margin improved, and that's obviously due to the kind of euro rates increasing and the quasi-euro countries like Bulgaria and Montenegro also applying that. Basically everywhere due to kind of repricing it on higher benchmarks, we see improvement. That combination resulted in this slight increase in the overall consolidated NIM. Hungary was flat at this low level, and all the other countries improved quite visibly. Volume dynamics, loans. Not surprisingly, loan growth slowed down to close to zero. Altogether, we had like 1% growth in the portfolio. That's in line with our kind of previous guidance of not more than 5% growth overall, so 1% in 1 quarter. Especially mortgage lending is quite weak.
With the exception of Bulgaria, there's actually not much growth, Hungary started to decline in terms of with mortgage volumes. It's the consumer lending which is kind of more robust in a way, especially Hungary consumer lending is still growing, albeit at a lower, much lower rate than last year, but it's still growing. In corporate volumes, there was some increase, namely in Hungary and in Bulgaria. This is related to one kind of larger deal which was booked in these two countries related to a leasing company in Slovenia, which we refinanced. Year-on-year changes, maybe not so interesting, I'm moving to the deposit section. Maybe to page 13. Yeah. One more. Yeah. No change on kind of deposit levels and group level without the NKBM acquisition.
Hungary was -one. corporate went down and retail was flat. In fact, this kind of retail being flat meant that our market share in retail deposits increased because overall in the market, retail deposits declined in Hungary. The corporate deposit volumes are very sensitive to pricing. The fact that you see some bigger plus and minus numbers means that we optimize the funding structure in each country, and we try to minimize the corporate deposits, because by far, they are the most expensive to take. We just take as much as really needed. In retail, it's kind of more flattish. In Croatia, we had some bigger decline in the first quarter that's due to factors.
One is that there's a, there was a Kind of very attractive price. Sovereign, retail sovereign one program, done in the first quarter at some retail savings and also kind of a few private banking clients migrated to smaller banks, which provide very high deposit rates. Again, this is far more than enough for Croatia, and they are quite liquid. Plus there was another impact that because the euro was introduced in January, first of January, and there was a lot of kind of deposits made to accounts of cash and people then withdrew in the first quarter. That's the other kind of technical impact here. We included one slide with further details on the deposits. In the share of insured, share of term.
Now these numbers are actually quite stable, we don't have a time series here, really stable levels in terms of share of term deposits. And also the pricing level of overall deposits for instance, Hungary quarter-on-quarter, it was flat, there was no increase, further increase in overall deposit cost of deposits. Going further to net fee income. Again, this kind of complicated structure in a way that you can get the numbers without NKBM by not looking at the gray numbers, then the real fundamental change can be captured in the kind of second number in the last one. Overall went down by 6%. Here, the biggest kind of factor was the kind of bonus payments to the fund management company in Hungary.
They overperformed the market last year and therefore in the 1st quarter, they received a bonus that's included here. In them, Russia went down somewhat, but that's more kind of seasonal there. Other income. There's some cross play here between Hungary and Bulgaria. These kind of intergroup placements and some swap transactions between the entities. They had some, especially on the Bulgarian side, explain some of the changes. In Hungary, we had FX gains and derivative gains. That's kind of trading results doing better in the 1st quarter. Costs. This is a difficult factor. I mean, we see kind of two, three bigger numbers here. Hungary, 25% year-on-year cost growth.
That's quite strong, it's led by personal expenses, other costs were strong. This is kind of related to wage inflation, slight increase in the headcount and a strong increase in real estate costs and other kind of service costs in Hungary. I mean Hungary, just to remind you, in Hungary, we have today inflation number was 24%, but the peak at 26%. Hungary is by far the highest inflation environment in the countries where we operate. Bulgaria 55%. Again, this is just a technical item. It's coming from this increased provision to deposit protection. Albania, we are still... I mean, the merger actually happened, the legal merge, and that had some extra costs. Here we are kind of continuing to merge the two entities.
Unlike in other processes, we first did a legal merge, the operational merge will follow. This kind of increase will disappear as we realize cost synergies. In terms of capital adequacy and liquidity, our capital ratios went down due to the NKBM transaction, so that's quite visible here. We expect another 30 basis point impact from the Ipoteka transaction, which should happen in the second quarter. Of course, in the meantime, we expect to generate earnings. Hopefully part of this will be compensated by earnings, retained earnings in the second quarter. We do quarterly reviews, audit reviews, we always kind of incorporate the quarterly results in the consolidated capital ratio. Liquidity remains robust. I mean, LCR ratio close to 200%.
Stable funding ratio close to 140%. We sit on 5 billion kind of liquid assets in Euro terms. If you go to the next one, this is the usual kind of portfolio quality. Stage 3 ratio continued to decline. Again, there's not much to talk about here because portfolio quality is again, quite robust, even in countries like Russia and Ukraine. There's not much to report here. Just a bit more color on the Hungarian situation. As you can see, mortgage lending kind of tanked. Applications went down by almost 80% year-over-year compared to the first quarter last year, which was a very strong quarter by the way, in terms of base, since that was the time for the green home loans. Nevertheless, this is the picture.
Mortgage lending is very low level in Hungary, whereas consumer lending is still okay. Some growth, as you can see, 2% growth on a quarterly basis on the consumer loan side in terms of cash loan volumes. Overall retail savings, our market share somewhat declined, but more importantly in retail deposits, so actual deposits, our market share increases. Our volumes were flat, so it means that overall in the market, there's actually a negative trend of retail deposits. People, due to the high inflation, are living up their savings and reducing their savings. That's one factor. The other factor is that they're saving. They migrate their savings to bonds, to typically sovereign bonds, and we have somewhat lower market share in that segment than other players.
In terms of the subsidized retail structure, the baby loan is getting less and less. I mean, it's basically the eligible client base is running out. This Green Loan Program, as you can see, this is nice. Last year it was very strong in the base in the first quarter. Still some going on, but we, in terms of issuance, the program closed more or less in the second half last year. Our market share was usually very high, 42%, much higher than our usual market share in mortgages. Corporate slowed down as well. I mean, we had a very strong year last year, 32% overall growth. This slowed down.
Started to slow down considerably fourth quarter last year and actually slowed down to 3% in the first quarter. Again, this was characterized by one big deal mostly. It's not. It may be much less the growth for the remaining part of the year. There are two subsidized structures, the Széchenyi Kártya and the Baross Gábor loan program. In both we are quite active and serve our clients. There's the usual ESG kind of information or rating keep improving. Sustainalytics, there was some improvement in terms of the riskiness, ESG riskiness. This is something we strategically focus on and keep as a very important factor of our efforts. In terms of the macro, Hungary has the lowest expected growth, even lower than Russia and Ukraine this year.
That's due to the very high inflation and the very high rate environment, which results in substantial drop in consumption, in new investments. There's a strong break on the Hungarian economy as they try to kind of moderate inflation to a more palatable level. We expect this effort to be successful, and we expect inflation to go below 10% by year-end. Obviously this kind of reduction will accelerate in the second half when the base increases last year. I mean, inflation really started to pick up a year ago in April, May, and then skyrocketed during the summer up to 26% year-end last year. Compared to that base, we expect only 9.3% further inflation.
The rate environment as well, we expect to drop below 10% by year-end, from which we will benefit in a meaningful way. Our sensitivity to the HUF rate is HUF 15 billion NII per one percentage point. This is true until 13% level from which there's lesser than that, only 6 billion per one percentage point. That's the Hungarian situation. All the other countries show somewhat higher growth potential and much lower inflation levels for this year. Something we should keep looking at. In all of these countries, we see a stable environment, operating environment. We don't see increasing risk or concentrations of risk. Again, even Moldova is doing okay.
Sorry, we had quite a big drop in the GDP. Again, Ukraine, huge drop last year and some improvement this year. As you could see, we have positive earnings in these countries. Now finally, for the color on the tax section go through, there will be a one-off, around EUR 200 million badwill impact. The next point here is the Net Interest Margin. As I indicated, the Hungarian core Net Interest Margin might not improve the second quarter, rather it should be less. We expect a decline in the second quarter. From that level, if the rate cuts manifest, we should see an improvement. The second quarter in Hungary will not be better than the first.
We do expect some improvements in the other countries, nevertheless, it may not be enough to compensate for the whole group level NIM. The group level NIM will be potentially impacted here as well. Now that's the good news. The calculation of the Windfall Tax change, it's closer now to a Windfall Tax rather than Extra Profit Tax. It's now for the second half of this. For the first six months, it's calculated the same method as it was done last year. For the next six months, for the second half of the year, the calculation methodology changed. It's basically pre-tax earnings, adjusted with dividends received and the extra taxes, and the percentage of that is the new tax.
Which in our case, results in 28 billion less tax. We are going to book this adjustment in the second quarter, that will be a +HUF 28 billion pre-tax number in the second quarter. The other kind of risk profile, cost efficiency, volume growth, we keep the kind of previous guidance or kind of stable credit profile, risk profile. Pressure on cost efficiency and the cost-to-income ratio and performing loan growth some more than 5%. The ROE around last year. Here we I think should note that the first quarter was much better than last year. Last year on average we had 18.6%. First quarter was rather to the tune of 22%-23%.
Our first quarter performed somewhat better and there might be some potential here to even achieve more than last year. That's the kind of short summary of the situation, and I'm sure you have some questions, so please ask them.
Thank you. Ladies and gentlemen, we will now begin our question and answer session. If you have question for our speaker, please click on Raise Hand icon to indicate or press star nine on your phone's dial pad. One moment please for the first question. The first question is from Gábor Kemény , Autonomous Research.
Yes. Hi. Thank you for all the insights. I'd like to pick up on your last point, when you noted that there could be some upsides to the ROE guidance. Can you talk a bit about this further? Where could the upside could potentially come from?
Risk costs.
Sorry?
Risk costs.
Risk costs. Okay. Okay. That is indeed what we saw in Q1. Yeah. My other question would be, can you... It's just a broader one actually. Where would you see the earnings share, the contribution of the Hungarian business relative to the foreign business is going forward in a normalized rates, normalized inflation environment if we don't assume more acquisitions beyond Ipoteka? Maybe next year.
I mean, in the first quarter it was 30%, yeah. The volume share of the Hungarian business from loans, for instance. Their share of adjusted earnings of the Hungarian entity was kind of 30%. I mean, look, Hungarian margins should improve in a lower rate environment if rates normalize. The subsidiary rates. I mean, okay, it's a question how fast. I mean, next year, I don't know whether the euro rate, what the euro rate is going to do. Maybe there will not be so much normalization there or reduction. Until we have this kind of current level of rate environment in kind of the euro-related countries and Hungary, we see a fast decline in the rate and therefore a NIM to improve somewhat.
That suggests that the Hungarian share could increase during the course of this year, the second half of this year. Next year, again, if the half Hungarian margin improves, then it can provide a boost. In terms of kind of underlying business, so if you exclude the margin from the equation, and just look at the fundamentals, volumes and then, and the sales and so on, then I don't see any leverage in Hungary. I mean, if you look at the macro data. It's going to be kind of challenging to on the budget as well and the inflation which is coming down from a very, very high level. Given the somewhat more challenging macro perspectives in Hungary, it's not...
The underlying businesses can actually grow bigger and faster outside Hungary than in Hungary. Especially if you consider Ipoteka. I mean, as big as Tamás, there's a huge growth potential there.
Okay. That's fair. Thank you.
Thank you. The next question is from an attendee joined via phone. I open the line. You'll be receiving an automatic message about it. Please press star six to unmute. May I ask the name and the company, please?
Hello. Good morning, everyone. This is Robert Brzoza from PKO BP Securities . I have a question regarding the outlook for the NII in Hungary. Basically, you sound more cautious this quarter. A quarter ago, you said you expected the NII to improve compared to the 4Q 2022. You alluded to the changed expectations regarding the interest rate outlook in Hungary, where during the call you discussed the lower income from the reserve requirement. Basically, my question is, what's the major reason behind the change in this stance? The additional one is there a need at OTP core to adjust upward the pricing for deposits, given what you said on the smaller competitors attracting depositors away, as I understood from the bank? Thank you.
That, that comment was related to Croatia regarding deposits. In Hungary and also in Croatia, we decided not to increase the deposit rates. In Hungary we also have not actually, the average overall level of deposit cost or average interest on deposits all in somewhat declined due to combination effect. No, there doesn't seem to be a need here. I mean, factually, the quarterly NIM improved from the fourth quarter, but that improvement was not as strong. It was only three basis points, right? Then in the second quarter, we are going to see two new factors. One, the reserve requirements reducing NII, right? The change in the reserve requirement. Hopefully if we the rate cuts can start as early as this month.
If the rate cuts start, then this can be kind of positive, but overall, we expect the change in the reserve requirements outweigh the short-term impact of the rate cuts. Overall, I mean, second quarter might be the kind of bottoming out, and then from there we expect improvement. That should. Again, if the rate goes down to the level where we expect, I mean, close to 10% or below 10% by year-end. These are the most important factors here. It's not free pricing of deposits, it's the reserve requirement change and exactly when the rate cuts start to happen.
We expected that somewhat earlier in our previous, kind of, expectations, when we told about the NIM development potentially in Hungary. I mean, again, quarter-on-quarter there was some improvement, but not much.
Right. If I may, to continue on the outlook regarding the cost of risk, do you think there is this potential for provisioning charges to improve potentially? It's coming more from decreased NPL formation across the board or there are better opportunities for write-backs and NPL sales. Which is the driving force behind it? Thank you.
It's stable quality.
Okay, thank you so much.
Thank you.
Thank you. The next question is again from an attendee joined via phone. I open the line. You will receive an automatic message about it. Please press star six to unmute. May I ask the name and the company, please?
Hello. This is Olga Veselova from Bank of America, thank you very much for taking my questions. I have several. One is about your sensitivity to lower benchmark rates. You mentioned HUF 15 billion, sorry, 1.5 billion and 0.6 billion to falling rates. Different changes in deposit rates. Could you please confirm this is valid for falling rates? Are we talking about sensitivity to BUBOR or the sensitivity to deposit rates? This is my first question.
The sensitivity is 15 billion per one percentage point, and it's related to the kind of benchmark rate, which is 18%, the overnight deposit rate.
Right. Okay, so it's deposit rate. Perfect. You mentioned that at some point it falls from 15 to six. At what level does it fall to that?
When it goes over 13, right? It's when the kind of reference rate catches up with the, with the base rate.
Perfect. That's clear. Thank you for that. My second question is about your cost of risk, which was a very positive surprise for us in the first quarter numbers. You'd mentioned that the asset quality outlook is stable. How shall we think about the cost of risk outlook going forward from the first quarter levels?
Again, we don't see portfolio deterioration. It can stay at a lower level, but it's a big portfolio and there's a lot going on macro-wise in this country. I cannot exclude a scenario where it starts to increase from the level we had in the first quarter. Nevertheless, I think it should not be higher than last year levels overall. So far there are no visible signs of this deterioration.
Right. Okay, thank you. My third question is about your, not your but the Hungarian interest rate caps. Could you just please update us on any conversations about potential extension of interest rate caps?
I'm not aware of any discussions here.
Nothing. Mm-hmm.
Other than us trying to argue for no further. There are some kind of messages sent, through the media, so bankers complaining and then the ministry people kind of arguing back. So far there's no clear indication of where this risk might go.
Right. Excellent. Thank you. I have last question. This one is less technical, more big picture holistic question. Historically, OTP was good in M&A and grew very well organically. Now, organic domestic growth is negative in real terms, and the latest M&A was actually outside of CEE. Could you share with us, what's your strategy for the next, not year, but maybe years? Where do you want to grow going forward?
We have a strong preference for growing in countries where we are present, so I think that that's by far the kind of strategic priority. Opportunistically, we keep our eyes open for other jurisdictions. First of all, we would like to grow in the countries where we are present.
László, thank you very much for your answers. Thank you.
Thank you.
Thank you. The next question is Mr. Mahesh Nabha from Kepler Cheuvreux.
Hi. Thank you for the opportunity. Just want to understand, you know, Magyar Bankholding is expected to be live in May of this year. From your, does that change any of your assessment of the competitive dynamics of the Hungarian market in terms of loans, deposits, market shares and the pricing of your deposits? How are you looking at the Magyar Bankholding and how what is your evaluation of it? Thank you.
Yeah. Well, in general, we welcome consolidation in the market that creates better competitive dynamics. It's actually we consider it from our perspective better that a kind of new entity was created as opposed to one of our foreign competitors buying up what is essence.
Just a follow-up to that. Another entity that's almost that could compete with you on market share, could that, could they start writing larger corporate loans? Would they be able to attract deposits at more favorable rates? Is there any chance you see this could affect the competitive dynamics of the market adversely? That's my last question. Thank you.
Usually less players mean kind of better competitive conditions, not worse.
Thank you.
Like, we are typically more conservative in every pricing instance than our competitors. I mean, we are always typically more expensive than competitors. We can do that because we are bigger than the rest. If there's another big entity, they can potentially also have this pricing power more. That should, in our view, ease competition not to increase. We'll see.
That's very helpful. Thank you.
Thank you.
Thank you. The next question is from Veronica Luta, Morgan Stanley.
Hi, this is Veronica from Morgan Stanley. I have two questions. The first question regarding the loan growth outlook in Hungary. How do you see the outlook for loan growth, and could there be any positive surprise?
I think until... I don't think this year will bring positive surprises in loan growth. Hopefully Kind of next year we're gonna see kind of single-digit rate numbers, and then we can expect again a revival of lending activity.
Great. Thank you. The second question is regarding your acquisition in Uzbekistan. Could you provide us with some more color about your expectations for Uzbekistan and the key drivers that make this acquisition attractive for you?
I mean, it's a, it's a large country, it's 36 million people and growing fast. Quite young, population. Under-penetrated and underserved in terms of banking services. Growing fast. I mean, the GDP growth is expected to be around 5% in this overall kind of environment. We expect a kind of very fast growth of the banking markets in Uzbekistan, and we would like to kind of take our share from that and benefit from being the first in the line of privatization of state-owned banks. That's the kind of underlying rationale. The last published data was for the first half last year, and there they made roughly kind of $50 million in 6 months in the kind of ROE of 22%-23%.
At least this much should come from them as a contribute first kind of contribution, first six months contribution this year.
Great. Just to kind of understand, like, what the competitive environment is in Uzbekistan at the moment, and where you see the most potential to improve Ipoteka operations?
Well, I mean, in terms of digitalization, it's, there are actually quite a good infrastructure services, and there's one kind of online player, Click, and there's TBC Bank present with a kind of primary online value proposition mobile or proposition. These are the kind of two strong retail digital players. Then it's the Our Ipoteka is the number five bank, and the first four are also state-owned. They are much bigger in corporate lending, and they are financing state-owned corporates. That's a different kind of segment strength than what Ipoteka has. Clearly our objective is not to be strong in corporate lending to state-owned companies. We want to focus on the retail.
Ipoteka has 30% market share in mortgages, so that's potentially a big area where we see market opportunity, given the very fast urbanization and kind of fast, I mean, large programs to build new housing for the growing population. I'd say the focus would be retail and the mortgages and transactional services, consumer loans.
Okay, great. Thank you.
Thank you.
Thank you. The next question is from Natalie joining by phone. I open the line. You will receive an automatic message. Please press star six. May I ask the name and the company, please?
I don't think it's from Friesen. I would tell many questions already answered, but I would have two, three. If you can maybe elaborate a bit on deposit pricing on company and price, how this is going in Bulgaria and in other countries like Serbia and Slovenia? What kind of... Compared to the previous quote, is there any type made of pickup there? I will never... Yeah.
It's also Romania where we see kind of strong deposit competition in terms of pricing. The other countries, not so much.
much. Okay.
Yeah.
Okay. You mentioned Romania. I mean, good question. I mean, you also mentioned scale there, we all know this. What kind of your strategy kind of going there? Let's assume, I mean, is there is no M&A in the next three-five years. Would you still consider kind of main country or whatsoever there?
I mean, this is a different question we have here, and so far only limited results. We have a strong operation there. We invested a lot during the last couple of years. It's now robust and strong, but it's a very competitive market. I think we have to kind of carefully consider what we, what we do here. It's a very attractive in this episode. It's very attractive for everyone is very in Romania. It's not an easy situation for us, and we try to figure out new ways to solve this situation.
Okay, thanks. One last, if I may. I have not seen any kind of explicit wording on Russia-Ukraine out, but I hope that given, let's say, kind of robust results Q1, that wording is similar to the last one. Expecting kind of better profit than compared to last year, right?
Yeah. That's very fair. Quite strong. In both countries. The only problem is that the equity is locked there. It's not. We cannot take out dividends from Ukraine and we have to figure out how to take out dividends from Russia. That's the only problem. The earnings are low there.
Okay. Thank you very much, László. Thank you.
Thank you. The next question is from Gábor Kemény with
Citi. Thanks for the opportunity. First question is just on the integrations that you're going to see, integrating NKBM and SKB. If you could elaborate on that and what kind of synergy you'd expect and how long that whole process will take. That would be the first question. Second, on Russia, you know, we've heard that Raiffeisen is looking to possibly spin off their Russian business by the end of this year. You know, do you see any opportunity to also exit? Last, if you could just comment, sorry if I missed this during the presentation, on potential extensions of some of the regulatory measures, like, I think, there's the windfall tax for an additional year. The same for rate caps in the second half of the year. Thanks.
Sorry, what was the first one?
The integration costs.
Got it. Yeah, yeah.
expected in. Yeah.
I mean, usually, it takes 18 months usually, and usually target maybe 30%-40% of the smaller entity as a potential cost synergy. I mean, costs, I mean, there's some kind of, we use consultants obviously and some additional IT costs usually involved, but it's not large, so it's not. I mean, the savings are much bigger. Russia, I mean, we continue to explore strategic opportunities, but there's a kind of. They were banned on selling these assets, so it's not. It's actually very difficult to do so. We continue to look at various options, but the kind of underlying scenario is that we continue and the business is doing okay. We are a tiny player in Russia, focusing on unsecured retail lending, consumer lending.
We are not very far from being systemic, and hope this is kind of acceptable for every party. I mean, selling the asset seems to be quite difficult. Measures in Hungary, I mean, we don't know. I mean, there is a, there's... I think that there's some reason to be potentially concerned that they might be extended. I think, I mean, the question is what are the conditions? Certainly the rate cap, I get... My hunch would be that it is going to be extended, but hopefully at a higher level than today. The tax, that's a longer story because then it is for next year.
I mean, there's a kind of backtrack accord with the previous tax, which was introduced for three years and then still stays with us.
Okay. Thank you. That's all for now.
Thank you. The next question is from an attendee joined by . Please press star six to unmute. May I ask the name and the company please?
Hello, good afternoon. This is Giuliana Sgorbini from Autonomous Research. Thank you for the presentation. Two questions please. I was wondering on your MREL strategy going forward. Would there be any plans to issue a senior non-preferred deal at any point in time beyond 2023? The second question is on the Slovenian subsidiary. It will have an independent MREL requirement. Just to confirm, you will apply a multiple point of entry resolution strategy there? Thank you.
Yes, I mean, at least for this year and next year, the NKBM entity is going to be separate from the rest of the group as an NPA subgroup. It's still a question mark what the treatment of the entity after the merger will be. Most probably it will stay outside as well as a multiple point of entry subgroup within the point of entry group. In terms of, I mean, for this year we indicated that it's senior preferred, it seems that we can fulfill the subordination criteria with requirements by doing those. No plan, no visible plan for non-preferred.
Okay. Very clear. Thank you.
Thank you.
Thank you. The next question is from Michael Sládky , JP Morgan.
Good afternoon. Thanks very much for the presentation. I have three main questions please. One on deposit betas in Hungary specifically. It seems the retail segment is repricing a lot slower than the corporate segment, which of course does make sense. Are there any reasons specific to Hungary that are keeping retail betas at these low levels you think? How do you see repricing evolve from here? You mentioned earlier in the comments, Laszlo, that deposits aren't really what will cause the margins to go down from here. Could you see a scenario where this becomes a pressure point later in the year? Second question, if I may, this is on cost of risk in Ukraine, which declined quite visibly this quarter, and in fact it was the lowest since the start of the war.
Still there was some visible increase in Stage three loans at the same time. How should we think about provisioning and asset quality dynamics in Ukraine specifically in the remainder of the year? Thank you.
Deposit pricing. Retail deposit pricing remains very low, and overall deposit pricing did not change from quarter to quarter. The reasons for that, probably, I mean, there's a lot of liquidity, so each bank is quite liquid. There are these levies and windfall taxes, so everyone has to pay high taxes in order to kind of earn enough to pay them. There's a kind of strong incentive to make profits. We don't have new players. Each bank which operates in the market has a quite robust kind of own portfolio. These portfolios would immediately reprice should they start to kind of increase the rates much more than competition. I think everyone understands that we can only lose...
I don't know, but, I mean, it seems that everyone is aware of the. Yeah, I support it. Yeah, there was a. The portfolio is quite okay. In general, we also have higher coverage on Stage two. The Stage three migration, I mean, to be frank, I don't know exactly what happened, but just checking. Overall, Ukrainian asset quality seems pretty robust and pretty stable, which is actually quite, in a way, surprising. I think the really interesting part is that we had increasing coverage with low provisioning. There what happened was that the portfolio overall declines.
Okay. Thank you. Very clear.
Yeah.
follow on this.
Yeah.
Is it reasonable to expect that these levels of cost of risk will remain for the foreseeable future? I mean, given, we were close to 3% this quarter, but the average last year was obviously significantly higher.
Yeah, now I got the figures. Yeah, Ukraine went up from 1,850 to 2,258, right? The Stage 3.
Yeah.
ratio. True. Here, it's also that the overall portfolio keeps declining, and it declines fast. I mean, even if there's no nominal... Part of this is explained by that it does... It's just the denominator getting smaller and smaller.
Okay. Makes sense.
Whether it can be characteristic for the whole year, I mean, at least as for the second quarter, it seems to be characteristic.
All right. Very clear. Thank you very much.
Thank you.
Thank you. If you have a question for our speaker, please click on raise hand icon to indicate or press star nine on your phone's dial pad. As there are no further questions, I hand back to the speaker.
Okay. Thank you very much. Thank you for joining us today, and thank you for your very good questions. Let's come back to the when we discuss the second quarter results. Till then, wish you all the best. Goodbye.
Thank you for your participation. The first quarter 2023 conference call is closed.