Dear ladies and gentlemen, welcome to the OTP Bank second quarter and first half 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. Good afternoon or good morning, depending where you are, and thank you very much for joining us today, on this very nice summer day at least here in Budapest. I really appreciate that you've taken the time to listen to us in this time of the year. The presentation, as usual, is available on the website and has been available for more than an hour, so hopefully you've been able to download it, but we'll also share it during the presentation and the conf call. I try to better restrain myself than usual and give a relatively succinct presentation of the recent results, and then obviously we can do a Q&A session, which will be more, probably more interesting. Nonetheless, start with page two. Maybe we can go to that page. Okay, wonderful.
I think, I mean, the glass is either half full or half empty, depending on which angle you want to look at this. If you look at the total profit after tax and the year-on-year development, then we are 80% minus compared to last year. But if you look at the adjusted profit after tax, but including the risk cost increase in Russia and Ukraine due to the war then, we are actually in 2% plus. Considering the and including the negative business impact of the war in Ukraine on the risk cost and on other factors in the P&L, actually, group level, we managed to year-on-year increase the adjusted profit by 2%. That's the kind of good side of the story.
The not so good side of the story is that during the first half of this year, there have been excessive, quite excessive one-offs. Part of them were related to the increased policy burdens in the format of excessive taxes, one-off taxes and this introduction or continuation of the price cap on variable mortgages in Hungary, which resulted in terms of after-tax almost HUF 100 billion one-offs negative. Another kind of close to HUF 100 billion came to other ramifications of the war in Ukraine outside Ukraine and Russia, namely the impairment we had to book on the Russian government bonds we are holding in Hungary and in Bulgaria, plus the goodwill write-off we had to do related to our Russian asset.
Huge negative one-offs in the first half, but the underlying without one-off performance, I think quite respectable despite the fact that we have this very special situation, very dramatic situation in Ukraine and the related situation in Russia. Now looking closer to the quarterly development of profits. Maybe we can go back to the previous one. Yeah, as you can see, the profit after tax, including all the one-offs, including this large special tax on OTP in Hungary, we made actually HUF 76 billion after-tax profit in the second quarter, which is a great improvement compared to the loss in the first. Again, the adjusted number HUF 162 billion, I think that's quite decent, and that's obviously far bigger than we have ever done in any quarter.
A year-on-year, this is like 25% up, compared to last year. Maybe we can move now to the next slide and page three. I mean, these are the group results, including Russia, Ukraine. First of all, I have to point out that exchange rate movements have been huge, especially second quarter this year. If you compare first quarter to second quarter numbers in HUF nominal terms as we present them in our reports, you may not get the full picture, because they have weakened, I mean to almost every currency, except the hryvnia, which weakened a lot, and the ruble appreciated huge, compared to first quarter.
In fact, if you want to understand the dynamics here, we would rather have to look at the quarter-on-quarter FX adjusted and year-on-year FX adjusted ratios, which are presented on the right side of the chart. Basically this rather strong improvement in quarter-on-quarter results from adjusted profit terms HUF 89-HUF 162. It was basically due to three reasons. One is the much lower risk cost. We provisioned much less, you will see in Russia, Ukraine. It went down from HUF 73 billion to HUF 32 billion. Half risk cost. The FX impact, which is quite substantial, and FX adjusted a 3% increase quarter-on-quarter operating profits. That's roughly the picture.
I think it's important always to take into consideration the large exchange rate movements, which do have an impact on our numbers. Going to the next slide, which presents the group results without Russia and Ukraine. I think this is kind of important to show these numbers, especially because we articulated our expectations after the first quarter based on these sets of numbers, so without Russia and Ukraine, and it obviously does make sense I think to continue to talk about these two parts of the group separately. If you just look at group performance without Russia, Ukraine, it was actually flat quarter-on-quarter. The cost of risk impact here was actually reversed, so we had less write back than in the first quarter.
We had some improvement in operating profits, 3%, quarter-on-quarter. If you look at the yearly, I mean, development, total income line 80% up year-on-year, FX adjusted. That's roughly the speed with which we are growing our loan book. This is not surprising because the net interest margin and in general revenue margins is close to being flat compared to last year. Basically income growth is driven by organic volume growth and business growth, and that was roughly in this kind of 7% to 19% compared to last year. Important line is the cost line, and year-on-year we had 11% cost growth, operating expenses, which actually created a positive operating jaws and operating profits grew 26% organically.
Now, obviously this operating expense line is the line where we will be strongly under pressure, and we will have a headwind in the coming periods, given the very high level of inflation and especially Hungary, the impact of the weak exchange rate on some of the cost base. This is going to be a challenging part. Now the adjusted ROE without Russia and Ukraine actually better than originally expected at 23%. We kept the guidance kind of being around the last year level, but certainly the first half performance was better than last year. Cost to income ratio improved again due to this positive operating jaws. The cost of risk was positive first half this year.
Might be actually closer to where we were last year for the entire course of the year, but we will see. Now, specifically Russia, Ukraine, a few highlights. In Russia operationally the situation is stable and we are gradually ramping up retail lending. The usual POS, mass market POS loans, and cross sell, credit cards and consumer cash loans. Despite a large volume decline that we saw, actually the new volume started to build up and it does seem to be quite profitably sustainable business even in the current environment in Russia. Whereas our corporate volumes drastically dropped. You will see that corporate loans, which were actually a small portfolio anyway. Now we are 50%, 50% down.
In fact we adjusted the operating model and now we really only focus on this kind of mass market consumer retail lending and pretty much given up corporate lending where we... It's extremely selective, but technically it's kind of zero. And that actually resulted in a profit in the second quarter. Obviously, we did not have to create further kind of excessive provisions because the portfolio quality remained quite stable. We haven't seen any unusual deterioration in portfolio quality. And we also reversed most of the kind of tax asset, accrued tax asset write of what we did in this. We were kind of maybe too conservative after the first quarter regarding these tax assets.
We have kind of moved them back and therefore you can see this big kind of change in the corporate tax in Russia. If you look at the first half, corporate tax is more kind of in line with kind of usual performance. Now, Ukraine. Again, in Ukraine, we book quite substantial risk cost. Even with this risk cost, we have positive kind of plus zero performance. Which has been kind of bolstered by the rate hike. The deposit rate, National Bank deposit rate is 25% now.
That means that even if our loans are going back down and repaid, and we have relatively subdued and limited new lending, we can actually maintain a decent net interest income level just by collecting deposits and placing them in the central bank. That pretty much, operationally or kind of P&L wise, stabilizes the bank and seems to be able to provide a decent operating profit, which can certainly absorb a relatively high level of cost of risk without making the bank loss-making. That's the trajectory where we are at the moment. In a kind of reasonably optimistic scenario, this can continue. It's very, very difficult to have any clear vision on where the situation can develop in Ukraine.
It is immediately linked, directly linked to the war situation in the country and whether that abates or exacerbates makes a difference in terms of having zero or slightly positive quarterly results or having another negative or more than one negative quarter in Ukraine. Whereas in Russia, it's as far as we understand the situation, the expectation is that from now on, we are going to make okay levels of profits with a smaller balance sheet, which focuses on this kind of consumer lending, retail business activity. If we kind of broaden our view to the picture to the other group members, then I think actually the story is quite positive. Most of the foreign subsidiaries have been doing very well.
Bulgaria is doing really nicely. I mean, profits quarterly up 27%, yearly it's 5%. Croatia has been doing phenomenal. It's really I think the bank, the market, the macro environment, they are joining the Eurozone. The country has been upgraded by rating agencies. The tourism is very strong. From every angle, they are doing quite well, and we are very optimistic. Serbia in this difficult environment, I think the macro and policy-wise, they have been navigating quite well, and this reflects in our results. Year-on-year 41% increase in profits. This seems solid and strong. Slovenia 22% annual increase in profits. I mean, this is a country where we are very keen to and very motivated to finally close the acquisition.
Hopefully, this is going to happen before the end of September, and then we can get into possession of Nova KBM and then start the merger and create hopefully a substantial uplift to our Slovenian nominal profits and also to the returns. Romania, we again moderate profits, but in line with this kind of aggressive organic growth strategy what we have there. Montenegro, we had that operational problem during the, I mean, the winter period, and then we. At the same time we have now a new management. So a CEO and a management team is partially ramped. So I'm actually quite positive that the bank has taken an even better direction than before. Albania, very strong performance. I mean, almost double their profit year-over-year.
The country is really in a very interesting situation. They are almost self-sufficient in terms of energy. It's hydro-based, so it's not carbon related. Somehow the whole economic environment started to make sense there, and there's rapid development. We are quite happy with Albania, and we are even happier that we just finished closing an acquisition there, which is obviously not a big bank, neither in comparison to OTP Group, nor even compared to the Albanian market, but nevertheless makes a very good addition to our activities there and helps to increase the market share of the bank by 50%.
This is kind of meaningful for our presence in Albania, despite the fact that on a group level it's not a big difference. Moldova is in a very difficult geopolitical situation. There's a strong recession there in the country. The IMF is there. Very high rate environment, very high inflation, enormous current account deficit. This is a country which is in difficult situation. I think the good news is that despite this being a relatively recent acquisition and in this difficult country, it's still making profits. I mean, obviously profits are lower by almost 40% than last year, but it's still positive contributing to the group. Hungarian leasing, Merkantil doing quite well, fund management doing okay. Then we have Russia, Ukraine, but we talked about that story before.
I mentioned the acquisitions. We nicely ticked this Alpha Bank Albania process. It's done. The last one in the pipeline hopefully will, as I just mentioned, happen by the end of September. We seem to be in a final phase before we see the answer from ECB primarily and also from the local competition authorities. If we dive into somewhat, I'm not going to dive deeply into these lines. Net interest income development, I think here it's important again to look at the FX adjusted numbers. Wherever we have these percentage changes year-on-year or quarter-on-quarter, we typically have two numbers, except Hungary. The second number is the FX adjusted one.
Even directionally, they can be very different. For instance, in Russia, quarter-on-quarter, in Hungarian Forint terms, we had NII went up by 22%, but in Ruble terms it actually went down by 17%. These numbers, I mean, the FX adjusted numbers seem to be much more reliable than the unadjusted. Fundamentally, I think it's true that in most cases, again except Russia, Ukraine, which are special ones, it's the underlying volume dynamics which drive NII. And in some cases we have seen changes in the net interest margin. Some improvement in Hungary, but kind of decline in Slovenia, for instance, and some decline in Serbia. It's a kind of mixed picture and group level more or less flat.
Talking about NIM, page nine is the quarterly change, and there was some improvement in Hungary finally. There's a small filtering in of the rate environment despite the kind of structure of the balance sheet, which is, I mean, we have this massive fixed assets in our portfolio which prevent the short-term impact of the rate hikes to manifest in higher NII. This will in a couple of years, if it's going to have this kind of low but high or high rate environment. A lot is related in the NIM change to Russia. Actually, if you just look at Russia standalone net interest margin in rubles, then it declined four basis points.
The overall NII in Russia shrunk, and that actually had an impact on kind of the composition of the group margin, so to say. The contribution to group level margin declined because the share of the Russian business declined, and that was actually negative because overall Russian margin is higher than the group average. That's the others -7%, mostly coming from this one. In the FX effect, again, most of it is coming from Russia and the appreciation, huge appreciation of the ruble compared to the first quarter, and again, having this kind of higher increasing share due to the FX impact. Basically, there ought to be Russia standalone, the FX effect and others, they are all related to Russia. They only kind of taken into three parts.
Other than that, Ukraine's slightly improved and Hungary's slightly improved. Okay. Looking at volumes. Quarterly loan growth volumes. We had a very strong quarter at 3% or 5% without Russia, Ukraine, because Russia, Ukraine was strongly negative. 10% in Ukraine, 10% Russia, -11%. But the rest of the group did really well. I mean, 5%. This is not annualized, obviously, this is just one quarter. Hungary was a strong rebound. You might remember first quarter, it was 0%, because mostly because of the consumer loans being even negative due to this kind of one-off windfall payment to our retail clients by the government. But then second quarter was 6%, which is one of the strongest in the group. But all the other countries did quite well.
I think four, five six percent growth quarterly basis in the bigger markets. Especially corporate was a strong driver. In many cases, this is driven by working capital loans increase or quite an increase in the utilization of the working capital loan credit line. What we see that lot of corporates are stocking, increasing their stocks, right? They're buying stuff, they increase their working capital and a kind of what we have is raw materials and so on. This is obviously in anticipation of raw material or parts price increase, but also even the kind of the.
I mean, the ready products volumes increase because they've kind of produced for kind of reserves in anticipation of future price increases. We do experience that, and obviously this is not going to last forever, right? This is probably a temporary one or two quarters situation, but that gave a big boost in many of the countries to our corporate loan growth volumes. Looking at the first six months, year-to-date performance without Russia, Ukraine, 8%, and this is obviously stronger than what we originally expected. Therefore, if you read our guidance, this is the line where we made changes. Previously we said that we expected around 10% performing loan growth without Russia, Ukraine.
Now we are more inclined to say that it is going to be probably more than 10%. It can be actually material more than 10% if unless there's a kind of unexpected development there. Again, I mean, the same pattern more or less. Around 10%, 8%-10% growth in most of the countries for the first half. In some countries, we have quite an interesting environment. For you, those of you who are from the Eurozone, it might be not, might kind of get used to it, but for us this is strange to see that we have very high inflation, right? Bulgaria, Croatia, Slovenia, Montenegro, around 15% inflation and it's still a very low rate environment.
It means that costs of loans remain low, especially compared to the level of inflation and the level of wage inflation. That means that even in this kind of high inflationary environment, in these eurozone or quasi eurozone countries, maybe loan volume, I mean, loan demand might stay actually quite strong. Whereas in countries where the rate environment has increased a lot, namely Hungary, I mean, that is the kind of highest increase in our, except obviously Ukraine, which is a 25% rate, but that's a different story. Also Moldova, which is close to 20%. These are, except those specific situations, obviously Hungarian rate increase has been quite material.
This is going to naturally impact loan demand, and therefore the expectation is that there will be less kind of loan growth in Hungary unless more subsidized rate products come and structures come. I mean, there have been some positive development on that front. You probably heard that the baby loan program has been extended by another year to the end of next year, and there's this Széchenyi Card Programme, which is primarily an SME loan facility, refinance and subsidized rate, quite attractive. That continues and that has been somewhat extended.
This is the right time for these subsidized structures to come in place and we will see how much is going to come and to which extent they are going to moderate the otherwise inevitable decline in demand for new loans. Deposit development, I mean, quarterly, 1%, and for the first six months, next slide, so 5%. The kind of deposit growth slowed down somewhat. I mean, it hasn't been in our focus, obviously, and given our liquidity, it's not in our focus. What very important is the Ukrainian and Russian situations.
I think it's important to note that both of these countries deposits have been growing despite the fact that we are very liquid and liquidity situation improved a lot in these two countries given the huge decline in loan volumes year to date. We are not kind of hunting for these deposits. They are coming to us, and I think that's a very strong and a very positive feedback that even in these very distressed situations, clients trust us maybe even relatively more than some other banks in countries where we are not big. In Russia, we are tiny, and in Ukraine as well, we are one of the smaller banks. This is not that we are kind of major players in these countries, but there must be some other reason.
Fee income year-on-year, 15% growth. Again, this is more or less in line with the overall kind of growth of the kind of group activities and lending. In some countries it was stronger, Hungary, Bulgaria, obviously Ukraine, Russia, year-on-year it's negative, which is not surprising given the situation. There's some quarterly noise as well. Typically in Hungary, first quarter is their own negative one-offs, therefore, usually the kind of growth in the second quarter is bigger than usual, but there's nothing fundamentally new here to mention. Page 15, other income. Again, there's some noise here, especially in Hungary, between the first and second quarters, so especially related to swaps, I mean ruble swaps. Positive first quarter, negative in second quarter.
That difference explains kind of half of this quarterly change. I think if you look at the year-on-year development is mostly explained by technical one-offs in the base. Again, there's not so much new story here other than typically technical changes in the base or in the recent periods. Operating costs. So far okay, but obviously this is something to be watched because in this high inflationary environment, we are exposed to these cost pressures, right? I mean, wage inflation high, energy price. Again, banking is not a kind of energy-intensive business, but we do have utility costs. They're going up and especially the Hungarian forint weakening is causing increase in kind of real estate rental fees and in IT costs.
So far so good. Again, positive operating growth, this is going to be a strong focus obviously in the future to try to moderate cost growth despite the fact that inflation is very high all around us in every country. In terms of capital and liquidity, there's not much development other than you probably heard that we kind of issued a Green Senior Preferred bond. This was our reintroduction to the market. I think last time we issued a senior bond was somewhere in 2006. Kind of 16 years ago. It may not have been the best time to start issuing bonds again, but we are obviously under pressure from the regulator to fulfill the increasing MREL requirements.
Therefore, we had to start this, and it was quite expensive, 5.5%. Well, expensive is relative because in fact, we were one of the very few financial institutions from the region who managed to issue anything in this quarter or in this period last couple of months, which would happen in July, so after June. We have seen higher coupons with similar rated banks from the region. In that perspective, even the pricing was kind of okay. This is certainly a very different environment in terms of cost of also funding. Despite the liquidity situation, it's not so much a choice to do this.
This is a regulatory requirement, and we will continue the last one and a half years especially to come to issue new primary senior bonds to eventually fulfill the requirements. There was a lot of movement in the capital and in the risk-weighted assets due to maybe if we go back to the previous pages. Comment is the effect again exchange rate FX rate change related changes in our capital base and in our risk-weighted assets was quite big, right? You see the first lines, I mean, HUF 313 billion increase in the capital and HUF 1.4 trillion half increase in the risk-weighted assets due to the FX rate changes.
This is just that we kind of as this natural hedge more or less in the group balance sheet or the in the group capital adequacy. I mean, as risk-weighted assets grow due to weaker HUF, the relevant regulatory capital increases as well. So the FX changes, FX rate changes explain quite a bit of the changes in the capital base and in the risk-weighted assets. In terms of coverage and portfolio quality, again, not so much change. Obviously due to the increase in especially in Russia, there was some increase in Stage 3 ratios due to the declining overall portfolio. Likewise in Ukraine, some increase, but it's not underlying so much.
It's just because the performing total loan volumes decline and therefore the ratios somewhat increase. That caused the increase quarter on quarter, but it was like 10 basis points, which is not big. I think in terms of level of coverage, we remain to be typically higher than some of our regional competitors. Usual three slides on Hungary. Hungary specific performance. I think one factor here is important, and if you look into the analyst tables, which are in Excel format on the website, you actually can spot it that already, for instance, mortgage demand for the market-based structures dropped substantially in the second quarter. That we do see.
Despite strong new mortgage generation and strong new applications, most of the strength is basically explained by the subsidized Green Housing Loans and demand for that and for the kind of market-based structures, the demand, I mean, this is not surprising, already dropped significantly. That means that if there's no further subsidized structure coming from the state, then it's likely that the mortgage lending, Hungarian mortgage lending in general, will slow down. I think that's an important message to make. Corporate loans was quite strong. Again, related primarily to this working capital loan volume increase, which is related to the usage of the credit lines our clients have had. ESG remains a strong focus overall.
Again, the bond what we issued in July was a green bond. It was our, not just our first senior bond for 16 years, but it was the first ever green bond. Actually there was a quite positive investor perception to the structure. I think we have done a lot in this. I mentioned during the last couple of years, and we will continue to focus our efforts on ESG factors, parallel. Finally, a few words about expectations. I mean, certainly the second quarter was rather more positive than we originally expected, so to say. That suggests some, well, at least short-term limited optimism, I think.
We only decided to reflect it in the loan volume expectations. Again, without Russia-Ukraine, group level loan growth, we expect to be over 10% as opposed to previously expected to be around 10%. Now this will basically suggest and reflects the 8% year-to-date performance. It's not hard to imagine that it's actually going to be more than 10. I think it's still likely that net interest margin will stay remain stable. It's a slightly increase year-on-year. Might be some slight more increase, but not material. Cost efficiency improved. We're happy about that. Risk cost ratio, again, first half it was actually positive. I mean, it's always a problem with this kind of whether the cost of risk is positive or negative.
We had write backs with that Russia-Ukraine portfolio first half, therefore the ratio is better than last year. We will see. I mean, we don't I mean, these are quite small numbers, either positive or negative, compared to the size of the group. At that level, it's kind of hard to be very specific about the forecast. I think the best kind of guess is that it's going to be the whole year going to be at the level of last year. The cost of risk ratio is clear. Profitability, again, this kind of adjusted without Russia-Ukraine number. First half was actually markedly better than last year. We kind of remain cautious in our guidance and around last year can mean that it can be kind of higher than last year.
Russia, I already told you that we expect kind of moderate profits, but profits to come from our Russian business. Ukraine is, I mean, it's just virtually impossible to forecast what exactly is going to be the quarterly performance there. It is 100% dependent on how the war situation develops. That was the kind of presentation on my side. I'm sure you have very, very good questions to ask, and we'll try to answer them in a meaningful way. Please 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 Gábor Bukta, Concorde Securities.
Hi, can you hear me?
Yes. Loud and clear.
Okay. Thanks. Thanks for your presentation. Just two questions from my side. The first one would be on your rate sensitivity to euro rates. I think in the previous call you said it would be around HUF 3 billion for every 10 basis points. Shall we translate the first 50 basis points of euro rate hikes to impact your interest income accordingly? How you see further rate hikes would impact this line. My second question would be on the agricultural moratorium that was introduced recently in Hungary for agricultural companies. I was wondering if you could tell us what is the exposure in Hungary for that sector in your loan book.
Mm-hmm.
Thank you.
Yes, indeed. The answer for the first question is yes. The 50 basis points rate hike we have seen so far should translate into five x three. It's the kind of forward-looking sensitivity is even higher. It's roughly EUR 10 million per 10 basis points. It's EUR 4 billion for us in current form. The difference is because now we are in a positive territory. In some cases, we didn't have negative reference rates. Therefore, up until it went up to zero, in some cases, there were no increase in loan rates.
I mean, these are typically corporate contracts, and they differ in countries and by clients, so it's not kind of overall, but we have quite a lot of contracts which worked in a way that the kind of reference rate could not go below zero in the pricing according to the contract. So far, the rates of these loans have not changed, but from now on, they will. That somewhat increases the sensitivity here. The loans with the loan book which can be impacted total is HUF 250 billion. To be honest, plus there's another HUF 50 billion off-balance sheet that applied.
If you take it on and off balance sheet amount, that's like HUF 300 billion, which is not a huge portfolio. It's pretty much impossible to tell how many clients really. It's an opt-in structure, so it's not automatic that clients participate. Clients will have to decide first half of September. Obviously, we will try to communicate to these clients, and we are very hopeful that these clients will actually approach us and discuss problems if they have any. There has been a strong drought in Hungary. It's really strong. Some especially crops production, it is strongly affected. Yes, some producers experience troubles, but it is certainly not across the sector. Hard to.
We don't have a good number how much participation we should see here.
Okay. Thank you.
Sure.
Thank you. The next question is from Máté Nemes, UBS. I open the line.
Hi. Good afternoon, and, thank you for the presentation. I have, three questions, please. The first one is on, market shares in Hungary. Can't help to notice, but essentially in all products and segments, you're showing, growing market share, be it in mortgage loans, cash loans or in the corporate side. I'm just wondering if you could give us a sense, why that might be. Is that, basically, the willingness to continue supplying credit whereas some other banks are holding back? Is that, due to, pricing or if there's any other factor? That's the first question. The second one would be, on intragroup funding to, the Russia and Ukraine as well. I just noticed that, in HUF terms, we've seen an increase.
Mm-hmm.
Can you just confirm that this is simply due to the Hungarian forint depreciating versus the ruble and the hryvnia?
Mm-hmm
that there's no actual increase in local currency funding terms? The third question is on Ukraine. You mentioned that currently you're seeing strong deposit inflows and you're placing this at the central bank at very high short-term rates, money market rates. Can you give us a sense what portion of your NII is coming from these deposits placed at the Central Bank in Ukraine? And perhaps also how much is cash and how much is accrual on the NII side currently? Thank you.
Yeah. I'm just writing down the questions not to forget them, sorry. Okay. I'm getting market share increase. In retail, it's basically a composition result. Maybe we can go to the slides, page 19. Can we go to page nine? Thank you. We always have higher market share from subsidized products, you might remember. Babaváró kölcsön, and we had, like, more than 40% market share. Actually it's on the following page. The Babaváró kölcsön market share, as you can see, it has been always about 40%. If you go now, also the Green Housing Loan, which is a subsidized product. We have a much bigger market share in this subsidized product than in general.
What happened if you go back to the previous page, what happened in the second quarter that both in consumer loans and in mortgages in retail, the market rate-based normal products volumes declined, new volumes, right? A much larger share of new production was coming from subsidized products. In the subsidized products, we have always had high, much higher market share than in other products. So it's not that we have done something differently, it's just the demand structure changed and we happen to be stronger on the market in the subsidized products and the demand increased in subsidized products and decreased substantially in the non-subsidized products. So that's the explanation. These are very kind of low risk.
I mean, this Green Housing Loan, I mean, it's 2.5%, right, max? For 10 years fixed or whatever years fixed, even more. Right? This is, and it's a gift more or less to clients who can take in this environment. I mean, if they put the money, I mean, they can't come because they have to buy, obviously, a real estate from this money. But if they anyway had the money and take this loan and put into a government bond, they earn kind of whatever, 7% or 6%, right? These are actually quite kind of low risk products. That's the reason. In retail and corporate, actually the increase was gonna.
It is kind of smaller in terms of market share, and it is more like this trend, right? We are seeing this trend for many years in corporate, that we have an increasing share, market share in corporate loans. That is kind of the market share increase actually slowed down sort of in this year compared to last year and previous years. Again, there is nothing kind of specific or extraordinary there. We do have this same phenomenon in corporate as well, especially SME. On this slide, on the right lower corner, you can see that for instance, the
That's very helpful. Thank you for all the details, sir. Thank you.
Thank you.
Thank you. The next question is from Gábor Kemény, Autonomous Research. I open the line.
Hello. A couple of questions on Hungarian asset quality, first please. I mean, the economy is slowing and the utility price freezes are being phased out. How do you think about the provision outlook in Hungary in this environment? How do you capture this in your guidance of stable risk costs, admittedly from a fairly benign H1 starting point. The other question is, how do you think about a more negative macro scenario and in particular a Russian gas cutoff, potentially how would that impact your provision outlook? My last question would be on Russia. You had a comment earlier today that you might consider a sale.
What options do you see to potentially work around the presidential decree banning the sale of foreign assets? Thank you.
Yeah. I mean, certainly the developments, the high inflation, and especially the excessive energy cost is negative, no question about that. It's going to have a negative impact on our cost of risk and portfolio policy. How negative? I mean, that's actually very difficult to tell. I mean, again, we made this guidance that we expect a similar cost of risk this year to last year. Last year we had some kind of risk costs for the whole group. This year so far except Russia, Ukraine, we had write-backs. I mean, the fact that we expect kind of similar levels to last year still means that there will be more risk costs second half than first half.
I'm talking about without Russia, Ukraine, because Russia, Ukraine hopefully will be less. Now in case of Hungary, I mean, risk costs are kind of very positive, right? I mean, for six months we had positive HUF 19 billion. Last year, first six months we had positive, almost HUF 8 billion. I think this is not going to continue long, so probably we will start to see periods with normal kind of risk costs, which means kind of negative risk costs. I think in a way, this positive risk cost is abnormal, and that's due to the fact that kind of two years ago we made these large provisions for COVID related problems, and COVID related problems did not happen at all.
We have still kind of reserves and kind of slowly we started to release these reserves. Now we have another problem which might be more material than the COVID impact was because COVID was rather kind of we were scared and we provisioned and everyone was kind of negative two years ago. At the end, basically, the situation turned to very positive, at least I mean in terms of portfolio qualities and banking kind of sector results. What happens now, I think it's extremely negative and difficult to tell. I mean, in a scenario where there's no gas, no Russian gas at all coming to Europe, I mean, that's a rather dire scenario.
Not just to Hungary, it's across Europe, especially Germany and some other CEE countries which are heavily dependent on Russian gas. I think it's very, very difficult to kind of capture the magnitude of the problems we are going to have. I think if that happens, then we will have strong policy measures, not just in Hungary, but across Europe, because this is not something which can be left to the market to be solved, I think, a situation if that happens. I don't know how to quantify that honestly, but it's certainly negative. I think a kind of a complete cut, stop of Russian gas, I mean that's certainly a tough scenario. I don't know how we're going to cope with that if that happens.
We also have to remember that this is a political decision. This is related to the war and related to the sanctions, which have been imposed due to the war. If there's no gas, then this is the counter sanction to the sanctions which were kind of triggered by the military actions and the war. This is not something fundamentally economically driven or it's not a fundamental supply demand imbalance. It's just it is a political decision. I think I can only hope that political decisions will be wise on both sides, right? Because if not, then if kind of irrationality and tit for tat negative spiral continues, then we might have actually strong problems.
These problems will not be specific to Hungary or the region, but certainly more, at least more on the European level. What was the last question? It was related to yeah, Russia. Right. Okay. Yeah. Selling. I don't know. I mean, there was this presidential decree that foreign banks, foreign assets cannot be sold. Now, every presidential decree can be overwritten by a presidential decision. I'm sure it technically is possible for Russian president to give a kind of one-off approval. We haven't digested this so much. Again, we started the process to explore if there's interest for the asset, and I can confirm that there is local interest for the asset.
Obviously, it is unclear to which extent meaningful discussions can continue in this situation, whether potential interested parties, Russian parties want to engage in a more meaningful and more detailed conversation and process given this ban. Because it's not just that we cannot sell, but they are not allowed to buy, right? I don't know. It does definitely at least slow down the process, and it has slowed down the process. I mean, we remain open to this, and we continue to explore strategic opportunities. Having said that, if we kind of just look at the economic fundamentals of the situation, as I said, we've stabilized the operation. Actually it's self-funded, it's profitable.
It focuses on the segment, which is I think the least sensitive politically. It's just the kind of mass market retail or even below mass market retail clients we have. We stopped corporate lending. We are tiny, by the way, in Russia. We are number, I don't know, 50 or 40, whatever bank. But it's still sensitive politically and we understand that. Having said that, we have regional competitors who are top 10, right? Still there and making enormous profits in Russia. Put it this way, we are going to monitor what they do with their assets and how they tackle the situation. Then I think that will be a guidance for us as well, given that we are tiny compared to them, and we are not serving state-owned or corporate clients in Russia.
We are only serving kind of low mass market retail clients when they buy a whatever, a microwave oven or a TV or something like that. I think it's a kind of different profile and much smaller. We do keep our eyes open and continue to try to explore this, the different strategic alternatives.
Thank you, László. Useful color. Just one small follow-up. Can you remind us how much overlay provisions do you have as of now, and how much you mentioned, I think, some releases in Q2. If you could quantify that as well.
I mean, in Hungary, in Q2, risk costs was + HUF 18 billion, right? I mean, that's. I mean, overlay, I don't know what an overlay means, in fact. I mean, sometimes it happens that you have situations when you create provisions based on kind of expert judgment, maybe more than on models. In our case, everything is model-based, right? I mean, we don't have an overlay which we just put there, right? Based on no data, right? For Ukraine, actually, we do have models and the provisioning is model-based.
Our models for the rest of the group suggested that we needed less provisions than what we originally thought we would need under a stressed COVID scenario, right? The COVID situation officially has stopped to negatively influence our business activities in the first quarter. We have adjusted our models according to that, and that resulted in lower provisions in some countries. I don't know. I mean, I think this overlay from a kind of accounting point of view, you cannot really. It is not very meaningful. Because you can only provision or release provisions based on some underlying rationale, and that rationale has to be either related to some client.
Observed client activity or change in client activity or the ability to pay or a specific economic model you have for the expected cost of risk for the future.
Yes. I meant.
We don't have an overlay which is somewhere outside this framework hanging overall. I mean, so we don't have that. I don't know how others can have that, if that's what you mean.
No, that's fair. What I meant was the provisions you created during the COVID crisis, given your macro assumptions back then, which you have not yet released, even though the macro situation, let's say, turned out to be more favorable than you had assumed. Sounds like there's not much of that.
We have released them, and we reallocated them. Partially we released them, and that's what you see. Partially we reallocated them. All of a sudden, there's another reason to provision more and to be kind of less optimistic or pessimistic for the future. That's the current economic environment, which is obviously deteriorating. It was that. I mean, yeah, the COVID reason ceased to exist, but now there's another kind of negative scenario we have to take into consideration. We calculated the two. There was a difference. The difference we released, and we have a new one now. That's the situation.
Okay. That's fair enough. Thank you.
Thank you. The next question is from Simon Nellis, Société Générale. I open the line.
Hi, can you hear me?
Yes.
Good. Thanks for the call today. Do you think that in terms of the way the government in Hungary is managing, you know, its budgetary needs and so on, is rational in terms of how it's working with the banking sector? I mean, for example, we look across to Poland, and it doesn't really look as if the reaction of the authorities at the moment is particularly rational. Whereas in your case, you've been slapped with a, you know, a two-year extra bank levy. At the same time, there are, you know, such big subsidized loan programs, which from what you said today, seem to be supporting volumes. These programs surely must now be, you know, more and more expensive for the government to maintain.
I wondered, do you feel confident that, when, you know, the government says it will, you know, continue these support programs for some time, that you can rely on that? Are we actually faced with a fairly important risk that these programs get withdrawn and until rates come down, you could have quite a sharp, you know, contraction in lending as a result. I just wondered how you feel that that's working, and what you feel about the development of Hungary, given the fact that you've got this, you know, take away with one hand and give back with the other. I'd be interested in your view on that.
In terms of your own reaction to the new bank levy, I mean, are you able to do anything in terms of commercial policy to take something back or is that just something that's not really within the spirit of how the relationship is moving forward Hungary. In terms of Ukraine, you know, were you positively surprised by the lower level of cost of risk in the second quarter? Was there anything specific, better collateral, better collection, that pushed that forward? I mean, I hear what you say in terms of it's not really foreseeable, but I think, you know, we were, you know, positively surprised to see Ukraine back at breakeven in Q2.
Oh, the first question is actually quite difficult to answer. I think it's clear that it's unusual how the policy environment works in Hungary. There seem to be a lot more intervention than kind of usual I think, or than the usually expected level, put it this way, in general in Europe. But this is not a new phenomenon, right? I mean, it started back in 2010. First it was negative, so we get the bank levy and the forced conversion, early repayment mortgages, so on and so on. Somewhere the tide turned around in 2015 when politically growth became the primary target.
Since then, we have seen a deluge of different subsidized products for retail, for corporate in various forms from the Central Bank and from the government. It's clear that we have benefited from these. Given our strong franchise and kind of ubiquitous presence in the country, we tend to have higher share of these kind of subsidized products than the kind of normal products. Even relatively speaking, you probably gain more than some other banks from these structures. Then from time to time, we get these hits, right? I don't know where the right balance is or whether balance is actually taken by anyone. We were.
I guess my feeling is that a lot of the support programs before interest rates went sky high were to some extent a choice. They were good for the consumer. They were good for you.
Yeah.
Supported growth. Now, they seem to be really quite expensive for a government that doesn't have any money. Without that, you know, the people and the businesses that would be taking loans from you would be paying an awful lot more. It seems to me that you are now, for the moment at least, a lot more reliant for the loan growth and the margin that you're getting from these support programs. Should they not be there, Hungary would be, you know, much more difficult. I mean, is that something you recognize?
Yes, obviously. Yeah. I think that's very obvious what you just explained.
Okay, you know, have you been able in your commercial policy to, you know, to do any offsetting or is it not really something that you can do? I mean, if you've got these bigger market shares.
You cannot change the existing contracts, right?
Mm.
I mean, we cannot increase fees due to this. In terms of new, it can be priced in into new production, but pricing is market, right, market-based. It depends on how the banking sector reacts to this. I think here, typically the most important one, whether what the expectations are. Whether other banks expect this to kind of be temporary for two years, which we are hopeful that it is, or not. If not, then obviously it has to become part of the new pricing. The existing product pricing, we cannot change, right? That's not allowed. This was certainly not the purpose of the measure. We cannot do that.
I mean, we are not in a position to change legal agreements with clients. It's only the
Okay.
Only policy level decisions can overrule the existing legal contracts, right? Now Ukrainian risk for second quarter was not a surprise to us at all. I mean, again, I think we quite diligently and conservatively provisioned in the first quarter for expected losses. Since the environment developed according to those expectations in the second quarter, there was no reason to create even more. Having said that, we actually provisioned a lot in Ukraine in the second quarter as well, right? It was HUF 22 billion equivalent risk cost in Ukraine, whereas in 2021, the whole year we had HUF 7 billion risk cost, right?
Mm.
In this one quarter, second quarter, we provisioned three times as much as in the whole year of 2021. It was just less than a half than we did in the first quarter. I mean, that's.
Okay. The fact that you sort of, you know, don't make a statement saying, you know, you feel, you know, you've done as much as you need to, is that simply based on, you know, the lack of visibility as to what the situation will look like at the year end? Because, you know, you would suggest that, you know, if things had got worse in the second quarter, then, you know, you would have not reduced. But your statement about the rest of the year, you know, unsurprisingly, isn't positive, is it, on Ukraine?
We are hopeful, put it this way, right? I mean, because in this tragic situation, the only thing you can do is to be hopeful and especially if you have people there, you are responsible to kind of try to project a positive future, picture of the future. This is what we try to do. Obviously, we are all subject to the military actions there. We are not able to predict what's going to happen.
Okay, thanks. Thanks for that.
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. May I ask your name and company, please?
Hi, can you hear me? Jovan Sikimic from ODDO BHF. I have few more questions on the outlook of net interest income, and mainly for some time you've been cautioning that the upside sensitivity of the NII in Hungary to rising rates is on a declining trend. My question is, have you actually reached a tipping point in the second Q? I want to put this question in the context of the past quarter results, when you mentioned that the NII in Hungary was hit by HUF 12 billion quarter-on-quarter negative difference generated by the swaps. Hence, I mean, for simplicity, if we assumed an upward correction of Q1 to Q2 NII generated by Hungary core, then second Q result would actually be softer, I mean, lower in quarter details.
Where do we stand today in terms of the potential upward sensitivity of NII in Hungary in this rising interest rate environment? That's my first main question.
In terms of net interest margin, there's not much sensitivity, so short term. I mean, it's more a kind of two to three years horizon that fixed assets will reprice either gradually in terms of the kind of, you know, fixed mortgage portfolio or just because replacement and the new when we replace the maturing government bonds, there's a higher rate there. The variable corporate loans are pretty much kind of balanced potentially. The potential impact coming from the variable corporate loans, and I'm talking about half, right, is more or less counterbalanced by the corporate deposits which are also variable. Now, where we have a positive sensitivity is the euro, the FX loans, and we do have FX loans in Hungary as well. I mentioned...
Talked about the overall kind of group level sensitivity to the euro rates, and that's like 10 basis points, roughly, EUR 10 million NII a year. The short-term sensitivity of the half portfolio's net interest margin is roughly zero. It's very sensitive to deposit pricing. It can even be negative.
Actually, yes, exactly. That's the, I think, I believe that's the question of the deposit pricing upward pressure. I assume for the moment it hasn't become negative yet, even given what we are seeing on the term deposit rates offered to households.
Yes.
Another issue here is that the share of term household deposits is actually at all-time low, below 20%.
Mm-hmm.
Whereas in the past it used to hover around 80%. Do you expect this share of time deposits to increase for some reason more rapidly in the coming future?
Yes. I don't think it has ever been 80%, but certainly more than the current level is the likeliest scenario. I mean, there are a lot of factors here, right? Liquidity levels on the market, the market is very liquid. The extra tax, I mean, the kind of alleged reason for this extra profit tax was this one, that the banks make so much money on because they don't increase the deposit rates, right? They kind of have taken away that extra profit. Now, in our case, it's not there, right? For banks which, there are some banks in Hungary who have not bought any government bonds, for instance, in the previous years.
For them, they actually have quite a big increase in their NII, right? I mean, deposit pricing is subject to competition, right? The banking sector is very liquid, and everyone has been hit by this huge extra tax. I'm not sure. I mean, we are exposed to this risk. Put it this way, that there is a risk of a potential kind of increasing the competitive pricing of deposits, and that's going to be negative for our margin in Hungary, for sure.
Fair enough. Lastly, the guidance on the euro, the ECB, interest rate upward movement. Here I wanted to ask, did you include in that figure the potential of the loan books to reprice in locations like Croatia or Bulgaria? Or did you only count in purely euro-denominated exposures?
No, that's across. Yeah. I mean, technically, I mean, the Croatian and Bulgarian rates are in sync more or less. Having said that, in Bulgaria specifically, retail loans are all variable, but they are. The basis here is not a market benchmark or the base rate. It's the kind of average cost of funding of the banking sector. It's actually related to the average deposit rates in Bulgaria, which is a number published by the central bank regularly. That's the index.
Okay. Thank you very much.
It's actually similar in Croatia as well. They have a specific national bank rate, which is the average deposit rates, and that is the benchmark for the retail. But for the rest
Thank you.
For corporate loans, which are repayable base, that's included in this guidance, which I gave.
Yes. Got it. Thank you.
Here the next question is from Gábor Bukta. May I ask the name and the company, please?
Good afternoon. This is Otto from Morgan Stanley. My question is about the corporate loans that you mentioned where corporates increasing working capital in Hungary. If you could comment which industries do you see this in the most, and what are the drivers or your expectations in the second half of the year? Secondly, you mentioned interestingly that the deposit bases in both Ukraine and Russia are increasing despite you being a relatively small player and despite all the challenges that are happening in this economy. I imagine it's hard to give concrete reasons for this, but just interested in hearing your thoughts. Lastly, about your ROE guidance, you expect it to stay similar to 2021 levels.
At the same time, your loan growth is expected to be higher than last year. Your cost of risk is relatively stable. Your NIM is relatively stable, potentially surprise on the upside. What is the negative factor that balances all this out, and why ROE this year is not gonna be higher than last year? Thank you.
I mean, it's not just Hungary, this working capital loans kind of increase. You see that in Serbia, Croatia as well. These are typically corporates who do production, right? Those who have inventories, and then they produce more for inventory, and they purchase more for inventory in order to stock up the parts they need and then also stock up the outputs. In expectation of. This is. I think that's a normal reaction in high inflation environment, right? You want to buy what you need to source, you want to source it at a lower price, expecting their prices to go up. What you sell as a product, you want to wait for prices to go up, right? This is.
In order to balance this situation and to fund this, you increase your working capital loans, right? This should be a kind of normal practice across Europe, I guess where there's high inflation. Deposits increase. Actually in Ukraine, I think it's it boils down to trust. Despite being small, in Ukraine, we especially, I think we have a very good reputation. It actually started with Raiffeisen because this bank, what we have in Ukraine, we brought it from Raiffeisen in 2006. When Raiffeisen entered Ukraine somewhere in 1997, 1998. They were there with the early 2000s. They stayed there. They stood by their clients.
We bought this bank, and then came the 2008 crisis, and we stayed there. We stood by our clients. Then came 2014, 2015, the war, when the war started again, we stayed by our clients. I think that has just built up a very positive reputation. What we have. I think this has been recently reinforced by the amazing heroic work of our colleagues there to maintain banking services in a war situation. Obviously it helps that we are a foreign bank and therefore there's more, kind of, a certain increased level of trust in these institutions in these difficult times. Same in Russia. I think the kind of foreign-owned banks. I mean, if you look at.
I'm sure you follow our competitors, right, which are much bigger in Russia than we are. They had an explosion of their profits there and their deposits and so on. There's a strong flow of businesses toward foreign-owned banks in Russia, right? One reason, and there are technical reasons as well, right? We are cutting back our corporate business and we play a special lending. I mean, these are important factors here. Now, ROE guidance. Yeah, we could have increased it, but I think the wording was kind of considerate when we made it. We said around last year level, so it can mean somewhat higher.
Having said that, I also indicated that for kind of outside Russia, Ukraine, we expect higher risk cost or actually negative risk cost, the second half of the year, as opposed to the positive risk cost or the provision release is what happened during the first half. This itself will make worse somewhat the profit, the profitability of the outside Russia, Ukraine activities for the second half of the year. To which extent, this is difficult to tell, right? I mean, look, even during this call, there was a question about the scenario if there's no gas. If gas supply stops to Europe, I suppose. I mean, that's a really dire situation which can trigger much higher risk costs than.
Well, there can be scenarios I think, and these scenarios are. I would say some people really expect them to happen on the market. If those scenarios manifest, actually risk cost can be much higher and that would have an immediate effect on our returns as well. I think it's still the right thing to say that probably around last year, right? We added one more. I mean, there's one more kind of comment there that was kind of word which is important too. Where is it? Yeah. Risk cost rate, right? We added another word here, and that is further, right? The credit risk cost ratio may be around the 2021 level, provided economic expectations won't deteriorate materially further.
The future was not there in the previous one. Now it's there. Because I think what we reasonably expect to happen, it's included, but there can be much worse scenarios unfortunately manifesting for the remainder of the year, for the winter or for next year. It's only, I mean, only our imagination creates a limit how much worse those scenarios can be.
It's very clear. Thank you for the detailed answer.
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 it back to the speaker.
Thank you. Thank you very much. Thank you for spending your precious time with us today on this wonderful summer day. Thank you for your very good questions. I wish you all the best. Very happy remaining summer holidays. Please join us when we report our third quarter results. We expect that to happen on the tenth of November. Until then, all the best, and goodbye.
Thank you for your participation. The second quarter 2022 conference call is closed now.