Dear ladies and gentlemen, welcome to the OTP Bank third quarter and first nine months 2022 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 very much. Good afternoon or good morning, depending where you are. Thank you very much for joining us today on OTP Group's 2022 Third Quarter Stock Exchange Report. I hope you have all been able to download the presentation if you wanted to, but using the new technology we are also sharing the presentation as I speak. I try to be relatively short and focusing on the key points and then as usual, we'll have a Q&A session. Starting on page two. The quarterly profit after tax was HUF 189.2 billion. Put it this way, the net adjustments, net one-off items were less than HUF 1 billion.
It was a relatively uneventful quarter from one-offs perspective, and therefore the difference between the adjusted and the actual profit after tax is relatively small. In the adjusted profit we made 16% quarter-on-quarter improvement, and that's also a historic high. We have never, ever had such a high quarterly profit, neither adjusted nor unadjusted, after tax profit. With this, the first nine months performance is still below last year, still below last year by 31%. The difference is due to two factors. One is the direct and indirect effects of the war in Ukraine. Our Ukrainian bank last year in this period made HUF 29 billion . This year in the first nine year, they made HUF 26 billion loss. That's one item.
As we previously discussed, among the one-off items you can see, two lines which are related to the war. That's the impairment of Russian government bonds which were made in the first quarter, and the goodwill impairment, and investment impairment, what we also had to do, in the first quarter. The other big kind of one-off hit on us were the various policy measures which had a quite sizable negative impact on our activities. Most of these manifested in the second quarter. Namely the big extra tax, which is named as extra profit tax, despite the fact that in fact in Hungary our kind of core Hungarian operations without dividends is still negative is because most all of these negative one-offs manifested, in the core activities in Hungary.
The adjusted profit first nine months 18% higher than last year, and this one includes Russia and Ukraine, so including the two countries immediately affected by the war we are 18% up compared to last year. If you move to the next slide, it's pretty much the same info here. Maybe the main performance indicators add some flavor to the picture. Without one-offs adjusted ROE, but including Russia and Ukraine was about 19%. Cost to income ratio improved, and risk cost ratio including Russia, Ukraine was 0.75%. Overall income gross 18%, and operating profits grew 24% year-on-year. Now when the war.
If you go to the following slide, when the war broke out, we and when we made our guidance in early March, we thought that it would be useful for all of us to present our guidance and also our numbers as OTP Group without Russia and Ukraine, given the high level of uncertainty in those two countries. Therefore, we included this view, the overall group performance without Russia, Ukraine. As you can see, this is actually quite okay without adjustment 30% year-on-year growth. Compared to the originally guided expectations basically on all lines. We do better, but I'm going to come back to this on the last page when we talk about guidance and guidance updates. Moving on to Russia and Ukraine.
In Russia, our operations stabilized in the third quarter in a sense of resuming more or less normal levels of lending activity. Just to remind you, we are not a universal bank in Russia. We focus on a small segment, which is unsecured retail consumer lending. Even in that segment, we focus on point-of-sale loans, which we sell through agents. We are a kind of very small retail consumer lender in Russia. Now that this activity and the demand for these type of POS loans increased compared to the second quarter and the third quarter, and pretty much the sales level third quarter were close to where they were last year. That's one thing. Pretty much this kind of volume dynamics started to restore to more normal features.
The other thing is that the excessive provisioning, what we made in the first quarter, expecting a major deterioration in the portfolio at that time, did not manifest. A, the macro situation turned out to be somewhat better than we originally expected. B, the portfolio itself has not shown any sign of distress or deterioration. Therefore, we made the required adjustments in the forward-looking provisioning models, and therefore we released a substantial part of the provisions, what we created after the first quarter.
Here, actually, in HUF terms, we realize an FX gain because we created those provisions on a much weaker ruble rate to the HUF, and we released those provisions, which were made in ruble, in a much stronger rate, ruble rate to the HUF, and actually in HUF terms that generated an extra. With this provision adjustment, in fact we are getting to a level in terms of earnings, again in HUF terms, which is similar to last year, first nine months. In fact, HUF terms, the profit after tax is exactly the same, HUF 24 billion. In Ukraine, we're still loss-making looking at the whole year, but the third quarter was slightly positive.
The expectation is that unless there's further deterioration of the situation and escalation of the war situation, it is possible that in the forthcoming quarters we are not going to see further losses on a quarterly basis. Having said that, it is very, very likely that we will end this year in Ukraine in negative, but it might even be slightly less than what we have accumulated so far by the end of September. We included these numbers. I mean, the share in the portfolio and so on and so on. The situation now I think is very much different from where we were sometime in March right after the breaking out of the war and starting the war.
We now more or less understand the type of challenges what we have in these two countries and the magnitude of potential losses, and neither of these countries seem to be kind of high risk in terms of questioning the sustainability of operation there or realizing losses in a magnitude which would question the ongoing sustainability of these businesses without external support. In fact, some repayments have been done from Russia from the group funding, so that not by the end of September, but it started in October, November. We are actually reducing some of the exposure to Russia in this way. The coming slides show the kind of overall kind of foreign performance or the subsidiaries bank's performance.
I think the very good news is that without Russia and Ukraine, the CEE subsidiaries of OTP Hungary seem to perform very well. The overall profit improvement is more than 30%. That leads us to page seven, where we can see the kind of one-by-one performance of these banks. As you can see, we see quite strong improvement in some cases, and some of these banks are actually getting quite substantial in terms of contribution to the overall performance of the group, for instance, in Bulgaria, 7% growth, but more importantly, Croatia 40%, Serbia 45%, and Slovenia 36%.
Even the smaller banks started to make meaningful and improving profit contributions to the group. Even Moldova is contributing positively despite the fact that this is really a country which is very directly negatively exposed to the situation, or war situation in Ukraine. Now we have Romania, which is still kind of zero profit, but as we have explained it so many times, this is not. This is reflecting the this kind of strategic approach that we have had for the last couple of years, that we wanted to invest into organic growth as opposed to focusing short-term profitability. The focus remained on profitability, but more kind of medium longer term. The expectation is that by next year, we are going to see kind of meaningful returns on these portfolios.
It can actually turn into kind of measurable and material levels of profits. Talking about the group and the growth of the group, maybe if you go to page eight, we can see the acquisitions. We did one in the third quarter. In August, we closed the acquisition of Alpha Bank Albania. It's a small bank, even compared to our Albanian presence, and it does not kind of substantially change our position in Albania. Certainly this is a country which we very much like and find attractive. The performance of the bank, what we previously acquired there, has been outstanding. We're very, very happy that we're able to buy this bank.
The kind of merger process already started, and soon we are going to conclude the legal merge, and then the operational merge will follow soon. We have the Slovenian story, which has been dragging on for quite a long. The good news was in September, early September, that the European Central Bank, who is the direct supervisor of NKBM in Slovenia, given Slovenia being a Eurozone country, approved the transaction. We are still waiting for the approval of the local competition authorities. We are not aware of any outstanding major issue which could impede the approval. Having said that, we have not so far received the result.
We are very hopeful that we are going to hear from them soon, and we are very hopeful that we can close this transaction before the end of the year, because it's not good for anyone. It's not good for the bank to be in this situation. NKBM is not good for the clients. It's not good for the seller. It's not good for us as a buyer. We don't understand why this process takes so long. It started somewhere beginning of last year. We hope that we are very close to the end of this discussion as well. There's a new development on the Ipoteka, Uzbekistan opportunity side. We just recently.
Actually, we announced it, that there was a memorandum of understanding signed in October between the Uzbekistan state parties who are responsible for the process and our bank. We restarted the process. We are doing another confirmatory due diligence. We think that it's high probability that the transaction can be made. We are actually very motivated and interested in this, in the country and specifically in Ipoteka Bank. We believe that this provides a very, very attractive investment opportunity. If anything, this attractiveness improved and increased since we kind of put the process on hold starting March this year after the war broke out.
I mean, going into more details, starting with page nine. I mean, by just skimming through these pages without going into very much into details, you can pretty much find most of the information here. I think what's important is on this slide and the following slides when we have the percentage change numbers, the first numbers are the nominal changes and the second line numbers where the two numbers reflect the FX adjusted change. In some cases, this can be quite substantial. For instance, Russia is a prime example, where in HUF terms even net interest income grew year-on-year, but in ruble terms it declined by 22%. So this is important to look at.
Overall year-on-year 16% growth, with Hungary being at 24, which is almost the highest growth. Basically only Moldova, which is very small, Romania. Where we have this kind of, as I mentioned, this kind of organic growth strategy focusing on revenue growth, actually the results are quite good. Then Ukraine, which is always a very special situation. The net interest income growth year-on-year and quarter-on-quarter, despite the strong volume decline, is actually due to the very high rate environment. The central bank is paying 23% on central bank deposits, and that keeps NII quite strong. Net interest margin slight kind of wobbling or noise during this quarter.
Hungary went down somewhat, but Russia went up, Bulgaria went up, and some FX impact and composition impact, but all under four basis points. That's rather noise than a major change. In terms of volumes, we had a very strong quarter. I don't remember many quarters which were so strong. In just one quarter we grew 5%. In some cases, namely Croatia, Hungary, it was even higher, 10%, 7% growth. Especially corporate, Hungarian corporate grew 13%, Croatian corporate grew 17%. Some of these growth rates are pretty strong. I mean, this is primarily related to these economies, especially Croatia, Slovenia, Serbia, Bulgaria, Romania actually do quite well and there are very few signs of kind of slowing down or immediate problems despite high inflation.
The high inflation environment makes, which kind of creates additional corporate demand. Corporates are stocking up inventories in order to buy kind of cheap inventory before prices go further up. In general, working capital loan requirements increased substantially. I mean, this is. I don't think this is going to be repeated this very high level of growth. I think it's rather kind of an exceptional quarter, especially in terms of corporate growth, but in some countries it's really quite strong. The other important message here is that the Russian portfolio dynamics changed. As you can see, consumer loans increased by 3%. That's a substantial difference. We had two quarters of steep decline, and then during the third quarter we had this turnaround in the trend.
If you look at the first nine months loan development numbers, the original guidance for beginning of March was kind of close to 10% growth for a whole year without Russia, Ukraine. Now, without Russia, Ukraine, nine months we have been growing 13%, and even including the big drop in Russia and Ukraine, by the end of September we were at 11%, so exceeding the original expectation in every sense. This is clearly a better picture than we originally believed in the earlier part of the year. Again, some countries show quite good performance here. Deposits. 5% growth in one quarter. Russia, Ukraine actually started to decline, but this is because we just don't need liquidity per se in Ukraine.
We are down to 70% loan to deposit ratio, and it's you cannot take out cash from the country, so we really don't need so much more or kind of deposits at higher prices. Likewise, Russia, by the end of the second quarter, the loan to deposit ratio went down to 105%. Kind of half of the net loan book is actually financed by equity, so the level of capital in Russia is very, very high. There's not much we can do with the excess liquidity. Therefore, we started to kind of price to the level of deposits to the level where we don't have much more growth in deposit levels in these two countries. Again, this is due to the very strong liquidity situation in both countries.
I think the other interesting number is the Hungarian retail growth, which already stopped in the second quarter but continued in the third. I mean, this is something which is due to the fact that the rate environment in Hungary is extremely high. Retail clients have access to very, very attractive and basically almost 100% liquid retail government bonds, tax-free above 10% and fixed or inflation plus %. These papers are actually attractive to the level that it's pretty much impossible to compete with them with deposit rates. This is a kind of understandable phenomenon. Year-to-date deposit growth.
Again, overall there's less, I mean, less to say here, other than that overall, I mean, volume-wise, deposits grew more year-to-date, HUF 2.2 trillion, or HUF 2.3 trillion . Without Russia and Ukraine, loans by HUF 2.1 trillion. Even without Russia and Ukraine, we had higher deposit growth than loan growth. Including Russia and Ukraine, the difference is even bigger. That means that overall this year we increase our difference between loans and deposits only increase. Page 15, the income. Sorry. I mean, 14% overall growth, FX adjusted.
If you don't adjust with FX, it was actually much more, but I think it's fair to or it provides a better picture if you look at the FX adjusted numbers. I mean, in general, this reflects the net fee income growth, the higher inflation, high economic activity. GDP growth typically in all the countries except Russia, Ukraine and Moldova has been strong for this year so far, plus relatively high levels of inflation. It's not surprising that fee income is growing quite strongly. In countries like Ukraine and Russia where economic activity declined, it's also not surprising that the income actually declined.
If you go to the next page, which is other non-interest income, there, I mean, I think the most important line is the last one, which, because this was actually material, a one-off transaction. We have a venture capital/private equity asset management company which manages a fund portfolio. They actually sold one of their investments with a large, very large or exited from one of the portfolio companies with a large one-off gain return. This is reflected in this strong third quarter number in the other line, right? This is this 21, which was kind of substantially increased quarter-on-quarter is driven by this one-off.
In Russia, we had the FX gains and we had the kind of derivative transaction gains, but albeit much smaller than the other foreign-owned banks, so to say, present in the country. We don't do much of those activities and actually it's less and less, so it's getting close to zero. Operating costs, if you look at the overall number, 12% year-on-year close to 20% growth, without the Albanian acquisition. I mean, high inflation unfortunately means high cost growth, especially if we want to maintain the level of service and competitiveness what we have, if we want to maintain the capacity to sell and to increase market share.
This is something which is the result of a higher inflation environment. The good news is that the kind of cost efficiency of the group improved despite this year-on-year cost increase. The cost to income ratio went down from 49.1%- 46.5% year-on-year. That's actually sizable and this is I think the important indicator to look at how cost efficient we are in this high inflation environment. Going further to capital. Capital situation was stable third quarter. Which is, it might be somewhat surprising that despite the large profit, there was less improvement.
I have to remind you that the loan growth in this quarter was also exceptionally high, and therefore this weighted assets grew, and there is also some FX movement which had to be compensated. This kind of 5% growth rate in one quarter required kind of some capital contribution, put it this way. Nevertheless, this is quite a strong position, I believe in CET1 terms and compared to our risk profile and also compared to maybe to some of our peers. Looking at the risk parameters. The portfolios have been stable with the exception of Ukraine, obviously. In Ukraine we are continuously increasing the stage three and stage two ratio.
For the rest of the group it's actually declining. As you can see, the stage three ratio declined a little bit during the last quarter from 5.3- 5.2. Without Russia, Ukraine, the ratio is down to 4.3. Obviously Russia, Ukraine are kind of high stage three ratio countries. The coverage has remained relatively robust, I think, especially for the performing portfolio, including and even without Russia and Ukraine. Two more slides and kind of three more slides and some detail on the Hungarian performance. Some notable changes here. For instance, in our kind of market share in new production in mortgages, it dropped in the third quarter. That's due to two factors, basically.
One, that the Green Home Programme loan, where we had, as usual, a much higher market share than from kind of market-based products. That started to decline, third quarter as we ran out of the allocated or the amounts that we could disburse. Also with the current rate environment, mortgage lending is actually a negative margin activity in Hungary, so you could only sell mortgages lower than the relevant sovereign bond rates for five to over 10 years, which makes this activity somewhat less attractive. Okay.
The other important thing here that I mentioned that there was some household decline, or it didn't grow the Hungarian deposit book, and this is also somewhat true for the rest of the market. As you can see, our market share actually increased during this year from household savings. It's not that other banks took retail savings and deposit volumes from us. Rather the opposite compared to end of last year, we increased our market share in the first 9 months from household savings. Page 21. baby loans still strong. Now, this is a very attractive and very profitable product now.
The last vintages, the third quarter vintage and the loans that we are selling now, they pay well above 10%, closer to 15%, kind of subsidy levels. Because here the clients don't pay for the first five years any interest. So that is actually by far the most attractive product and profitable product in the group, given state guarantees and. Corporate, page 22. Again, we were quite active third quarter, and we have been quite active since the beginning of the year in corporate lending, despite the somewhat more difficult environment. The whole market grew fast, so our market share only increased by 30 basis points in the third quarter and the year-to-date increase is 90 basis points.
This is actually something we continue to do. We believe that this is a long-term profitable segment despite the kind of interim difficulties, especially with new developments related to the interest rate caps, which were extended for mortgages till the end of June next year, extended to five and 10 years fixed mortgages, which would reprice during this period, and also to SME loans. The impact of this we did not book in the third quarter because these measures were announced second part of October. It's a kind of subsequent event, but we included it in the expected potential loss from this in the interim report.
In the report itself, this is included and the expected amount is roughly HUF 40 billion after tax loss, calculated on last day or two days figure, reference rate levels in Hungary, which we have to book this quarter, so the amount will be booked in the fourth quarter. Having said that, obviously the expected loss due to these measures depend very much on the kind of rate environment and rate level and just as we speak or soon after the U.S. inflation data came out today, Hungarian yields started to plummet. I think there's a fair chance that this very extremely high rate environment in Hungary has only been temporarily and very soon we hope to see a moderation in the rate environment. Our ESG activities remain in strong focus.
There's one good development, I mean, or objective external reflection of our efforts. Sustainalytics, they improved our rating from medium to low risk. So our efforts have been to some extent acknowledged, and the results of our ongoing efforts to improve on this front have been somewhat acknowledged by at least Sustainalytics. Then going to page 24. This is some update, but more a kind of small cosmetics on the guidance that we made at the beginning of the year in March. Again, at that time, given the very high level of uncertainty, we decided to focus the numeric guidance on the group without Russia and Ukraine.
We continue that kind of practice despite the fact that actually no more today more or less, I think the Russian and Ukrainian business activities are falling more back to a kind of more predictable framework, so we could actually extend and include them as well and certainly I very much hope for next year we will include them, and we are not going to have separate ones because I hope they will be much closer to normal levels of operation than we thought beginning of this year. Nevertheless, a few words on this. Where we have clearly need to update our previous expectations as the volume grows. We started the year suggesting that maybe we can be close to 10%.
We are above 13% and we'll push very likely to reach 15%. Now we say around 15% performing loan growth without Russia, Ukraine. Russia started to grow, Ukraine continues to decline. Net interest margin stabilized group level. Hungarian margins still not so strong and short-term not growing. Rest of the CEE operation margins rather improving due to the higher rate environment in Hungary. We are still stuck with this large fixed sovereign bond portfolio, I mean, and that makes basically our interest rate risk very, very low, so earnings don't so much react in HUF terms to rate changes in Hungary. They do react to rate changes in Hungary in terms of the euro position.
Therefore some improvement might actually happen, but that will be rather next year than short-term. I think we kind of remain at this guidance level that it's basically similar to last year. Cost efficiency, we have seen some improvement and we hope that this improvement will last for the rest of the year. Risk cost rate. Again, without Russia, Ukraine, actually we had write backs. First nine months, especially the first and second quarters this year. Third quarter, as you can see, we started to provision. That's due to the deterioration in the forward-looking macro expectations, IFRS 9 type of provisioning we made in many countries. It was not due to kind of portfolio deterioration, it was more due to the expected slowdown in GDP growth for next year.
Profitability, again, it seems to be higher than like last year so far, and we're very much sure that it's going to remain there. That was pretty much the formal part. I'm very sure you will have many good questions. Please, I'd like to ask my colleague to open the floor for questions.
Thank you. Ladies and gentlemen, we will now begin our question and answer session. If you have a question for our speaker, please click on the Raise Hand icon to indicate, or press star nine on your phone's dial pad. One moment please for the first question. The first question is from Gabor Kemeny, Autonomous Research.
Hello, thank you for the presentation. Firstly, can we talk a bit more about the Hungarian NII dynamics? I would be interested both in your comments on the margin and the volume outlook. If I understood correctly, you were saying that some margin improvement might be possible next year. If you could elaborate on that. Yeah, it seemed to me that some of the factors you mentioned, like the large treasury portfolio or the negative lending margins, are likely here to stay. The other question would be on the rate caps.
I understand these are moving, I mean, the impact is moving as the rates move, but perhaps can you give us some sensitivities here, and what would be the possible impact of extending this rate cap until, I mean, for the second half of next year if rates stay here? Thank you.
Okay. I mean, as usual, we don't give guidance for next year at this point in time. I think we going to keep that tradition. More explicit guidance we are going to give as usual when we talk about the year-end results early March. Also we have. I mean, we are still working on next year's budget, so we won't even have the numbers, especially not approved. It would be quite premature to give you guidance, and we usually don't do that. Having said that, yes, we have corporate and sovereign fixed portfolios when they mature, right? Not the entire one, but some part of it will mature.
In terms of euro, I mean, on the FX, in FX, we don't have so much fixed portfolios. We have an open kind of interest rate position there. We are actually benefiting from increasing euro rates in Hungary and in the other countries as well. Well, I mean, when I said negative margin, it means it's still kind of the new mortgage production today is still twice the yield or 3x the yield what it was a year ago. It's lower than the current benchmark, but kind of 2x-3x more than last year production and kind of almost 2x more than the total book. It doesn't mean that for a new perspective, this is actually not positive.
More to come in March, so please kind of bear with us. The rate caps, again, I said that HUF 40 billion plus, and it's pretty much, it's not entirely linear, but I think that's the best proxy study. The base rate was or the reference rate was fixed at 7.7%, and today it's around 16.5%, right? For two days ago. That's so basically if you go down, if the reference rate, if BUBOR goes down to kind of 8% and it tomorrow, then it's zero for corporates. But also for the. It's a bit more complicated for mortgages, but this is but this is also kind of similar.
Between those two, I mean, the best proxy is just a linear function. I hope the eventual loss will not be HUF 40 billion, but probably this is the number where we will have to book now, and then we will see if there's a decline in the rate environment. By the way, which I really expect to happen, and then it's going to be less than that.
Got it. Thank you, László. Just to follow up on the euro rate sensitivity, what is it now, roughly, and what is it going to be if Croatia joins the Eurozone soon?
I mean, it's already. I mean, Bulgaria, Croatia, these are already, despite not formally being in the Eurozone, the rates there pretty much move together with the Eurozone. It's like 1 percentage point is roughly EUR 100 million-EUR 150 million per year in terms of NII.
Got it. Thank you.
Thank you. The next question is from an attendee joined via phone. I open the line. You will receive an automatic message about it. Please press star six to unmute.
Oh, hello. Good afternoon, everyone. Can you hear me?
Yes. Loud and clear.
Thanks for the presentation. This is Robert Brzoza from PKO BP Securities, Warsaw. I have a question on prospective capital requirements. Where do you think within, say, two years' time the minimum requirement will be on the consolidated level, also including the combined buffer requirements for MREL? And where do you see the MREL issuance going forward? And finally, maybe how and if that's gonna affect the prospective dividend payout policy.
I mean, the MREL requirement, the obligatory one starting from January 2024, including the buffers and the expected development of the buffers, what you are aware of is 24.2%. Having said that, either today or maybe tomorrow, we are going to have a new resolution from the resolution board. It may be exactly the same, it might be somewhat different, but we are going to update, I mean, and make an announcement once we receive that. We don't expect a major change here, so it's roughly 24%. That's our ultimate MREL requirement level.
The other kind of change in the requirement is basically the other systemic buffer in Hungary, which was temporarily when COVID hit for 2021, it was reduced from 2%- 0%, and this year it went up to 0.5%. Next year, it's going to be 1%, and in 2024, it goes back to 2%. That's the kind of biggest moving part. In terms of capital adequacy ratio, again, by 2024, the requirement is going to go up to 15%, including these.
Regarding the dividend policy, do you think that will affect somehow the payouts, compared to, let's say?
Well, there's no.
Historical average?
I mean, in terms of requirements, there's no new news, right? We don't have any major changes in the requirements. Therefore, the level of the capital requirements does not trigger any change in the expected level of dividends. What is different is the kind of, in a way, cost of Tier two, AT1. There's currently, in my view, an extraordinary unique level of risk aversion on the fixed income front, and therefore rates are exceptionally high. That can have some impact.
I think this is temporarily, and I expect the bond and corporate bond rates to start to normalize again once the overall global rate kind of development trajectory changes, which might do soon. In terms of kind of short-term dividend payments, again, this is something we have not structurally thought about for next year, so there's not much I can say on this front. I mean, there are a lot of moving parts and, personally, I'm very optimistic regarding the potential changes in the environment, and I expect a much smaller slowdown in GDP activities in the countries than currently usually expected. We will see.
Again, updates on dividend payments will be done next year. I mean, what we will suggest to pay to the AGM.
Oh, understood. Thank you.
Thank you.
Thank you. The next question is from the analyst of Morgan Stanley, Otto Szilagyi.
Good afternoon. Thank you for presentation and taking my questions. I wanted to ask about your proposed transaction in Uzbekistan. Namely, what changed since April when you postponed the deal? What made you turn more positive? Generally, what's your view, thoughts on the macro in the country? They have quite ambitious targets in terms of privatization. FDI is generally liberalizing the economy. Interested to hear your thoughts about the transaction and the general economy as well.
I mean, the general economic situation improved, and they actually very rapidly progressed on the path what they decided to go through. This is very visible, I mean, since the beginning of the year in terms of new developments, I mean real estate prices, economic activity in general. The value proposition of the bank itself improved a lot. They came up with a very, very modern state-of-the-art mobile banking solution, which is, I think, I mean, competes with the best in Europe, I think in terms of service level on their own. Very, very fast. That was just a development during the last kind of eight months, right? I think geopolitically, I think Uzbekistan positioned itself very wisely in this conflict.
If anything, I think the geopolitical attractiveness of the country improved. If anything, they accelerated their efforts to move the economy into a kind of market-based environment. They seem to do what they say, right? Evidence is accumulating, so as time goes by. I think this is a very good sign. I mean, numerically, I mean, we expect more than 5% GDP growth for next year as well, where most of Europe is going to slow down strongly. They have inflation, which they consider high, but it's already lower than 10%, but they think it's high. I mean, when looking at European inflation levels, it's actually, I mean, it's lower than Eurozone.
Nevertheless, the expectation is that it's going to be further reduced. They have a somewhat higher base rate environment compared to the inflation level, which again, we expect and they expect it to moderate. I mean, just today, our prime minister and a big Hungarian delegation, including my colleagues from OTP, are there in Samarkand, in a big kind of regional forum. There are a lot of bilateral discussions between Hungary and Uzbekistan, and Uzbekistan and other countries. They improved their political relationship with the neighboring countries dramatically. I was there last week, and I was quite impressed.
Do you have any target timeline of closing the deal?
If it's up to us, the sooner, the better.
Great. Thank you. Speaking of inorganic opportunities, earlier you mentioned also, something in China. If there is any update that you could share at this stage.
There's this potential for setting up a joint venture where we would be a kind of minority investor. We are still focusing on trying to get the license. We are still in this early stage. Having said that, the most difficult thing is getting the license. No, there's nothing I could tell you as an update. We are still working hard on this, and we are making small steps, but it's a long road.
Thank you. Lastly, continuing on the same path. On Slovenia, are you aware of any issues that is holding off the final approvals, or you feel you are on track for closing by end of year?
We are not aware. We are not aware of any issues. They communicated to us that they don't require further information. We are not aware of any issue, no. There was one concern they had. It was kind of a year ago when they told us that we have completely changed the structure of this transaction and we addressed this, but that addressed that particular concern. But that was like, I don't know, eight, nine months ago. Since then, we haven't heard any tangible kind of problem, right?
Understood. Thank you very much.
Thank you. The next question is from Alan Webborn, Société Générale.
Sorry. Hi. Could you just elaborate a little bit more on the trends in provisioning in Hungary in the core business in the third quarter? You know, was this a sort of preemptive cautionary, you know, IFRS 9 related? Just give us a little bit of a flavor there. I mean, I know overall you're talking about, you know, risk costs being, you know, below what they were in the full year of 2021 now. But just to give us an idea of what you know, what was going on in Hungary in Q3 would be helpful.
Yeah. It was exactly what you just mentioned. It was a forward-looking IFRS 9 related provisioning due to the GDP. Unfortunately, and I hope this is going to be better, but the consensus view is that Hungary will not perform as good as the neighboring countries in terms of GDP next year, put it this way, and we had to reflect it in the IFRS 9 forward-looking provisioning. That was it. Having said that, I'm more optimistic than this, but well, obviously we have to rely on typically external sources when we talk to our auditors regarding the macro expectations.
Would it be fair to say that you've perhaps done in Q3 what you would, you know, traditionally tend to do in Q4?
I mean, I don't know. I mean, this was just I mean, every quarter we have to do this exercise, right?
Yeah.
Um.
Okay. I guess the you know what happened in Q3 was more unusual in terms of what happened to rates and so on, so okay.
Yeah, absolutely. This was just related to the kind of worsening macro expectations, not just in Hungary, but across the countries. In Hungary it was unfortunately again, Hungary is expectations are more negative in Hungary than, let's say in Slovenia, Croatia, Romania, Bulgaria, Serbia, right?
Yeah.
In these countries, we also expect some slowdown in GDP growth. In Hungary, I mean, the slowdown will be according to especially external forecasts much more pronounced and maybe even recession is going to happen in Hungary. This happened, these expectations were formed during the third quarter, and therefore we had to reflect it in the IFRS 9 provision.
Could I also ask?
The portfolio did not deteriorate. It was not because, I mean, there was a strong migration to stage three or something like that. It was more like this.
Understood. Could I also ask, I think you mentioned that you'd been able to reduce the sort of group funding to Russia. Did I hear that right? If so, how did you actually do that? I mean, I didn't think it was possible to repatriate anything from Russia at the moment. Could you just say how you've managed and what you did to do that? That was the second question.
Well, this I mean, somewhat, you know, since kind of late summer authorities have become more open to actually close expiring deals. It's not that we kind of took out something, it's just there were some loans which expired, and it was possible to pay them back.
What you're saying, the Russian business was allowed to pay back.
Yeah.
loans to the group?
Yeah. It started. Yes.
Okay. Okay, that's interesting. I guess sort of finally, just to come back on Uzbekistan, I mean, I hear your enthusiasm clearly. Clearly there's a broader agenda between Hungary and Uzbekistan. But when you sort of, you know, slowed down the idea of that deal earlier in the year. You referred to it as being, you know, outside your comfort zone in more difficult times. Clearly the situation as far as the geopolitics in Russia haven't changed. You know, I think you've reiterated what you think the cost of having to walk away from Russia would be in terms of your CET1. You know, the chances of that happening don't seem to have really changed.
This is, you know, moving ahead and do you have a, you know. Are you now an exclusive partner? Because I think when you slowed it down, I think the state was quite, you know, could go and sell it to somebody else if they wanted to. It sounds as if you're more committed now. And, you know, what has changed? Is it just that the operation and the business is so much better than it was when you first looked at it? Or are you more comfortable with the group's level of core Tier one ? You know, what's changed? Because the geopolitics, if anything, is worse. It's not really better, is it?
For Uzbekistan, I think the geopolitical situation, I mean, obviously, I guess it's subjective and depends from where you look at the situation. I think from a geopolitical point of view, Uzbekistan became more attractive than before. I think the way they positioned the country in this, vis-à-vis Russia during this period, if anything, I think improved their geopolitical attractiveness. This is, I think it's, I mean, it's not just my view. I mean, when I talk to other investors who consider the country, it is actually kind of visible that there's a lot of buzz related to the country, yeah. You are absolutely right that the war is going on. It, if anything, has escalated and reached really tragic levels.
Compared to where we were, let's say at the end of February, where we temporarily put the process on hold, we have much more understanding now in terms of how this conflict develops and what the implications on our businesses are in Russia and Ukraine. As I said, in Russia, the business is going okay. I mean, it's a very basic plain vanilla business focusing on consumer lending. Makes money, doesn't require capital, doesn't require funding. It's quite profitable. In Ukraine, unless there's a major deterioration of the situation compared to today, which I clearly do not expect, then we might not have more losses.
Okay.
Actually, we expect more losses in Ukraine. I think this is a major change compared to where we were in March, right? We didn't know what was going to happen with our banks in these two countries. Yes, you're absolutely right. The overall geopolitical tension and problems have not been resolved. The very specific situation of our banks in Russia and Ukraine, there's much more visibility, clarity, and they more or less stabilized and adapted to the new environment.
Okay. I guess.
much less uncertainty from my point of view, [audio distortion].
Okay. At the same time, arguably, it's going to be a more expensive acquisition, isn't it?
I mean, if you forgive me, I mean, it's a deal which have not been made, right?
Yeah. I mean, it's gonna be more expensive now.
It's quite unusual that we talk so openly about something which we have not concluded yet. I don't think we should disclose kind of these type of detail.
Okay. You know, the HUF is weaker and their business presumably is developing more strongly.
I mean, yes, HUF is weaker and they develop strongly. True.
Okay.
Those statements are true.
All right. Thank you.
I hope the HUF will appreciate soon. Their businesses continue to develop. Yeah, that's true.
Okay. Thank you.
Thank you.
Thank you. The next question is from Mehmet Sevim, J.P. Morgan Securities.
Good afternoon. Thanks very much for the presentation and the comments. I have just one follow-up on the Hungarian NIM, if I may. I do appreciate you are unable to provide too much color on 2023, but from a quarterly perspective, maybe, how would you see it evolve in the fourth quarter after this sizable 23 basis point drop, particularly because there seems to be a loan pricing delay among others as you provide in the comments?
I don't expect similar drop in the fourth quarter. There is a time lag between the deposit and loan repricing. Now, there's this kind of cap on the interest of the variable loans for part of the portfolio. Actually that doesn't appear in the NIM because the caps, the introduction of the caps, we have to book the whole expected amount or impact when they are announced, right? We show them as one-off, so the actual caps don't have an impact on the NIM, what you see. They come through as one-off, one-offs.
Okay, it's.
I don't expect similar decline.
Certainly some further decline is possible. Is that correct to assume?
I mean, there's always some noise, but not similar level for sure.
Okay. Great. Thank you. If I may, just the second question, that would be on Croatia. Do you see any opportunities or pressure points across the P&L lines once they enter the Eurozone and, maybe for example, in the fee line?
Absolutely
FX fees, et cetera.
Very clear. Yeah. Absolutely. I mean, this is FX conversion income. Fee income is meaningful there given the tourism and this is going to be, yeah. I think the benefits will far outweigh this negative, especially mid- to long-term.
Okay. Great. If I may just finally, any color you can provide on the NIM drop in Romania and Croatia finally, and particularly Croatia, I was interested given obviously the rate trajectory in the Eurozone at the moment?
I mean, it's related to the past corporate loan growth, right? Corporate loan growth is extremely strong. Corporates have typically lower margins than retail.
Okay. Great. Thanks so much.
Thank you.
Thank you. The next question is from Hitan Lepong, Concord Securities.
Hi. Thanks.
Yes.
Can you hear me?
Yes.
Yes. Okay. Thanks for the presentation. I have a question on your asset quality moving to 2023, and I know that it's pretty hard to forecast anything or to say anything, but ex-Ukraine, Russia, and particularly Hungary, could you share with us, like, what is your view on non-performing loans? I mean, are we talking about, in the worst case, the doubling NPL or it will grow but maybe not significantly? Or what is your view on that? Thanks.
Certainly the expectations are very far from doubling, so I don't see that scenario. I mean, the risk-free rate this year for ex-Russia, Ukraine countries was quite low, right? So far, it is going to remain low, and last year was quite low. Compared to last year, this year there will be an increase in the risk-free rate. We don't expect anything dramatic.
Okay, thanks.
If you have a question for our speaker, please press 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.
Thank you very much. Thank you so much for joining us today and listening to the presentation, and thank you for your very good questions. The next conference call will be when we present the year-end numbers early March. I hope you will join us for that occasion as well. Until then, all the best and goodbye. Thank you very much.
Thank you for your participation. The Third Quarter 2022 Conference Call is closed now.