Dear ladies and gentlemen, welcome to the OTP Group Q1 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. Thank you very much. Good morning or good afternoon, depending where you are, and thank you for joining us today on OTP's 2022 first quarter investor call. We presented our numbers as you can see on page two
, maybe we can move there the presentation. Yeah. Overall, we booked a quarterly loss. The accounting profit after taxes out of the group was actually negative, which is a rather rare event. I think circumstances are also quite special and rare. We try to as much as possible preemptively react and reflect the deteriorated expectations in Ukraine and Russia due to the war. That reflected in the first of all stand-alone Ukrainian and Russian results, which were negative all together. In Russia, we booked minus HUF 27 billion .
In Ukraine, minus HUF 34 billion equivalent. On top of that, we have made certain adjustments necessary to reflect the values of these entities and also related to instruments which are associated with Russia, namely the Russian bonds we have outside Russia, in Hungary and in Bulgaria to a smaller extent. As you can see on this chart, we booked HUF 122 billion one-off adjustments. Part of it was kind of recurring, quote-unquote, "usual adjustment" by the special bank tax.
These two, the impairment on the Russian bonds in Hungary and Bulgaria, it's clearly a one-off related to the kind of initially or book or kind of nominal value of HUF 100 billion equivalent of ruble bonds, which, I mean, to be frank, we don't quite understand to a full extent the current legal status of these bonds.
Certainly they are not freely tradable and there's not much market for them, and also it's kind of unclear whether they are already in a technical default or not or will they ever be. We took a kind of a conservative approach, obviously, with the approval of our auditor, to actually assume that these loans, these bonds are in default and therefore PD is one.
We applied an LGD, and we also for the AFS portfolio, made a mark-to-market valuation, which had an impact on capital. On top of this, we also had another effect, which is reflected in the capital. All in the net value, the net book value of these bonds went down from HUF 100 billion to HUF 40 billion equivalent. Now the other big one-off here is the goodwill write-off related to the Russian bank. We acquired this entity in 2006, and I'm sure many of you remember that at those times it was quite common to buy assets well above book, and we did that, and therefore there was an initial goodwill.
By this time it was clear that the kind of valuation of the franchise changed in the way that we had to write off this goodwill. It obviously does not have an impact. It doesn't have an impact on the regulatory capital because goodwill has already been deducted from regulatory capital. It does have an impact on the P&L, and also it has an impact on the kind of accounting equity of the book.
Then there were two more kind of usual lines which go up and down depending on what happens in the group. One is the acquisitions, which was a kind of usual quarterly negative, and the other one was the valuation of the OTP-MOL share swaps.
That's this kind of bigger amount is related to the fact that dividend expectations or actual dividend payments changed a lot compared to the previous expectations. For instance, in case of OTP, after 2021, we only, I mean, the AGM decided to pay only HUF 1 billion out of the last year results. In case of MOL, there is one of big dividend payments.
That kind of required an adjustment of the fair value adjustment of this structure. Now, adjusted profit after tax was HUF 88.6, which again lower than last quarter or year-on-year. That is solely due to the fact that we had losses as I said in Ukraine and in Russia. I will show in detail, a bit more detail on this.
I mean, we decided kind of split, to have a view where we split the group into Russia, Ukraine and the rest of the group, and that's probably a good way to approach these numbers. Now looking at capital, our capital adequacy somewhat declined during the first quarter. It went down to 16.2. Common Equity Tier 1. This is still almost, like, two times the capital requirement being 8.8%, so very comfortable. On this slide, you can see the kind of quarterly changes which had an impact on the capital, regulatory capital, also risk-weighted assets. Obviously here, the overall loss, the fair value adjustment of the AFS portfolios.
Here I'm not just talking about the Russian bonds, but also typically Hungarian bonds, which had a negative mark-to-market valuation on the small portfolio which we keep in AFS. Plus, risk-weighted assets increased, and this was partially due to volume growth, but also the largest thanks to increasing risk weights, especially in Ukraine, but also in Russia, due to the downgrades of the ratings of these countries. We had to increase kind of standard rate risk weights for these portfolios, which kind of substantially contributed to the kind of credit risk risk-weighted asset growth, which was part of this HUF 544 billion increase in the credit risk risk-weighted asset what you see on the chart.
This is a slide which kind of tried to show the magnitude of the exposure to Russia and Ukraine. This is what we started to show you when we talked about the year-end numbers in the previous occasion and presented. The change is mostly related during one quarter to the kind of lower right corner two boxes where you can see the consolidated capital effect. This is the total impact of writing off the Ukrainian bank and the Russian bank or kind of separately. This scenario we don't expect to happen. We consider this very unlikely and very kind of low probability and extreme bad scenario. This includes the write-off of the group funding and also the capital.
We have the bonds, the Russian bonds, which are outside Russia, and their value obviously went down due to these changes that I just explained. We also adjusted to the much smaller portfolio in Russia in terms of Russian books. Here the market is really split because these Russian bonds are tradable and can be traded with a kind of relatively small discount in Russia. As opposed to the situation outside Russia, where it's really questionable whether they are tradable, and it's also even more questionable whether any payment to these bonds can go through the global primary U.S. kind of payment system. Therefore, technically, Russia can or cannot service these bonds according to the original structure.
Now, if you look at the next page, you can see that overall, despite high provisioning, the Stage three ratio did not increase. It actually decreased. This obviously includes Russia and Ukraine. While we can say that at the end of the first quarter, but also at the end, I can tell you at the end of April, we did not see material worsening in the portfolios, neither in Russia nor in Ukraine, and nowhere else. This is the existing provisioning and the additional risk costs we created are all based on worsening forward-looking expectations, and expected loss numbers. We believe we remain kind of conservative or became even more conservative given the extra provisioning we did in the first quarter.
If we kind of compare ourselves to various banks which are either present in Russia and Ukraine, like Raiffeisen Bank International being very present in Russia, Ukraine and also Belarus, and UniCredit being very strong in Russia. If you compare the performing coverages to these banking groups and we compare our kind of our numbers, including Russia, Ukraine 2.4%, we seem to be higher. If you compare to banks like Erste Group, which does not have Russian, Ukrainian operations or portfolios, and we compare our without Russia, Ukraine as performing Stage 1 and Stage 2 coverages, then there's also a kind of difference. We continue to believe that we remain reasonably conservative in provisioning, and this is something we try to continue to do in the future as well.
Running a bit more into the details of the P&L and looking at the adjusted profit after tax, there are some questions to be discussed on this slide. I think one interesting one, why the tax was so high, why the effective tax rate was so much higher than at usual level. Now, obviously, it's also related to Russia and Ukraine. Despite having losses in Russia and Ukraine, we have not created deferred tax assets. So we did not assume a recognizable tax shield on these losses. On top of that, we have kind of written off the deferred tax asset, which we still have related to Russia in our books.
It doesn't mean that it's impossible in the future or it won't happen, that we can actually materialize at some point these kind of tax shields or deferred tax assets. It's just the prudent way to reflect these numbers in line with the goodwill write-off related to Russia. We decided to also write off the deferred tax asset. What the corporate tax increase, what you see here is related basically to this Russian and Ukrainian activities and the very conservative treatment of deferred tax assets for these two countries. I think the other very obvious number to look at is the risk cost. We booked as much risk cost in the first quarter, almost exactly as we did last year.
Obviously you will see that most of it or that all of this was related to Russia and Ukraine, because for the rest of the group, we actually released provisions. Then going forward, you can see the kind of per country division of our contributions to the adjusted profit after tax. Hungary was strong, but basically in Hungary, Croatia, Serbia, Slovenia and also in the leasing company in Hungary, we released provisions in the first quarter. What happened exactly was that we went through this exercise that we started from the assumption that the COVID situation basically ended after the first quarter. By then, there were no restrictive measures present in any of the countries where we operate.
We assume that basically the COVID itself is not going to have negative further impact. Therefore, we started to release the extra provisioning, which we still kept this year and last year for COVID reasons. We kept it at the end of last year because COVID was very much present here in this part of the world at the end of the year last year. There were still certain restrictions on economic activity and then kind of social activities. At that time, it seemed quite reasonable to maintain these levels. By the end of the first quarter, it lost its relevance. In a way, we partially released these provisions. At the same time, parallel to this, we also looked at the kind of worsening GDP growth expectations.
Here I'm primarily talking about outside Russia and Ukraine. Because the recent expectations at the end of the first quarter were worse than what we had before the war broke out year-end last year, we had to update our models because of the deterioration of the kind of GDP expectations, we had to create additional provisions. What happened was that we released the big part of the COVID-related provisions previously created back in 2022, and then either released them or reallocated them to IFRS 9 provisions related to worsening GDP expectations. The result of this exercise was different country by country. In some countries, it resulted actually in further provisioning, like in Bulgaria.
In some countries, namely Hungary, Croatia, Serbia, Slovenia and also in leasing in Hungary, it did result in some provision release. The biggest one happened actually in Hungary. So this kind of these differences in the risk parameters somewhat kind of positively affected some countries and obviously had very negative impact in Russia and Ukraine. Talking about this, I think the next slide is potentially the most meaningful to talk about the group at the moment, because I don't think it'd make much sense to talk about the group as one entity. I think we have to slice it into three. One is the group without Russia and Ukraine. This is where we pretty much have normal operations. COVID over, inflation is high, and GDP growth is somewhat slowing down compared to last year.
I mean, fundamentally, we have a kind of reasonably business as usual environment, and therefore the numbers kind of reflect that situation. Also we were able to provide you with a reasonably detailed guidance on these numbers. I think somewhat or reasonably optimistic guidance on this part of the group. Now, Russia is very different. There's a very special situation in Russia. There is no war, but the war has a huge impact on Russia, especially through these sanctions. Our kind of GDP expectation for this year is around 8%, so we calibrated the IFRS 9 models accordingly, and that resulted in an additional provisioning need.
We created 23 billion HUF equivalent of additional risk cost, and that resulted in this 27 billion HUF quarterly loss in Russia. Again, if you look at the portfolio in Russia, we don't really see signs of deterioration. What we see is the kind of lower volumes and lower volume growth, but not so much deterioration. Therefore, we actually think that this is probably conservative enough, and if there's no further substantial change in how the environment develops compared to what we expect, then it might be or well, could be or may be, we won't have any losses for the future quarters in Russia, and we actually expect positive contribution. Ukraine, bigger risk cost, 49 billion HUF. Obviously a war situation, which is very dramatic and, I mean, I.
As I told you last time when we talked about the fourth quarter results, really our colleagues have been working heroically to maintain the bank, maintain the services of the bank and serve our clients and protect the value of the franchise. I mean, 80% of the branches are open, all the services are on. We even restarted selectively lending. Despite this, we had to provision strongly, and then we had a kind of two approaches. One is we did a bottom-up review of the portfolio and looked at each and every exposure where it was physically, I mean, where the client is and where the assets are.
Depending on the impact of the war, either direct or indirect impact on these exposures, we classify them to different categories and provisioned them accordingly and moved them to Stage 2 quarterly. On top of that, we applied an IFRS 9 kind of forward-looking provisioning, increasing coverage levels. Here the GDP trajectory assumption was 30% decline this year and a very kind of rapid rebound next year, resulting in a 10% net decline in two years in GDP levels. Now, if you look at the group without Russia and Ukraine and the kind of performance indicators, first quarter adjusted ROE was actually quite strong coming from positive risk costs.
As I said, in the kind of without Russia, Ukraine, this exercise of kind of freeing up COVID related provisions and creating new IFRS 9 forward-looking provisions based on the GDP expectations resulted in a net positive number. It was HUF 9 billion. Obviously this are high ROE and strong adjusted profit of HUF 150 billion, which is like more than 50% up quarter-on-quarter, was strongly bolstered by the positive risk cost. If you look at the operating profit line, this was also strong, 15% quarterly growth, which is, I think it's, obviously, there's a seasonality in cost. I mean, the fact that the first quarter cost was lower than last quarter is not necessarily surprising.
The fact that total income grew 3% in this quarter for this part of the group. I think this is okay, and very importantly, performing loan growth for this part of the portfolio was 3%. If you look at kind of P&L lines, page nine. NII decline, and that might be kind of surprising given the increasing rate environment. The decline comes from two countries. One is Russia, where maybe it's not so much a surprise, right? Given that primarily because of decline in volumes, that's what happened. You will see that we had in Russia 7% quarter-on-quarter decline in the loan portfolio.
Based on that, it may not be surprising that we had like -6% growth in NII. Might be somewhat more surprising that we have this kind of -4%, 4 billion HUF in Hungary. The next slide, we kind of try to provide some more detail, some more flavor on this decline because not just NII went down, but obviously kind of group level and OTP Core net interest margin also declined. I mean, this is the decomposition. As you can see, the group level decline was primarily due to Hungary, but the secondary cause was Russia. Again, not surprising, and that might continue to happen. Looking at what happens in Hungary, I think that's an important question to answer.
I mean, this very rapid quarter-on-quarter rate increase had an impact, a negative impact on our swaps. There was a swap revaluation result, which was negative. It shouldn't recur so much, so that's potentially a one-off. We don't expect similar to happen in the Q2. There were some other effects. The kind of corporate and micro small loans gradually repriced, so there was a kind of upside coming from there. NII increase in margin, positive margin contribution, whereas retail loans, which are almost all fixed, I mean, we have 80% of mortgages fixed, but the remaining 20% is also under the rate cap. And kind of 90% of the consumer loan portfolio is fixed.
Plus, here the composition effect is negative because we still have a kind of fast-growing part of the baby loan program, which is kind of lower rate than the rest. Obviously very profitable, but lower rate. As you will see, we actually had a 2% decline in consumer loans in the first quarter this year in Hungary due to the fact that retail clients received a one-off windfall of revenues. There was a personal income tax rebate. They received back their personal income tax, which they paid last year, if they had hit up until a certain cap, up until the average pay kind of tax payment.
Therefore, it actually reduced the people early repay their consumer loans, but even more importantly, there was an automatic reduction in the used overdraft kind of volumes. As people had this one-off, the overdraft facilities they used up disappear or they were paid back rather. Then we had some gain in financial assets including the higher return on the national bank deposits, but this was mitigated by the higher cost of corporate deposits, which tend to increase. We have basically increase in corporate deposit rates, and then we kind of place them into these two financial assets, and there's some gain there. That's overall positive.
The other effect was basically that we had much more deposit growth than loan growth. This is kind of a plus. We had large repo deals which inflated some of the balance sheet. There's this kind of balance sheet inflation, which is a negative impact on the NIM itself, not so much on the NII by the way. All in, we believe that this quarter-on-quarter negative NII development, HUF 4 billion, that was a one-off event, primarily due to the swap revaluation results. We expect increase and improvement in NII in the Q2. How exactly it's going to translate to margin depends on the kind of balance sheet growth. In fact, for the kind of retail, especially deposit growth and repo facility growth.
Volume-wise, it's important to see that, I mean overall we have 3% growth. If you take out Russia and Ukraine, without Russia and Ukraine, we also have 3% growth for the rest of the group. When Hungary was actually zero, so again, that's another unique feature of this quarter. That unlike the last five years when Hungary was one of the highest growing countries in terms of performing loan growth, was actually zero.
That zero is primarily due to the fact due to this -2% consumer loan growth. Which, I mean, you can see and I kind of explained why it happened. We don't expect this to continue or repeat. Therefore, we expect for the remaining quarters of this year, consumer loans to start to grow again.
Mortgage growth and corporate growth was there, but somewhat lower. I will give some more detail on mortgages because here the situation actually is somewhat more complicated. We had very high level of applications with a relatively low level of disbursements. I'm going to kind of explain this will happen. Now, in Ukraine we had +5%, which was, I mean, it just reflects that in January, February we had fabulous two months. Then the war came and obviously we are not going to have further volume growth, or we don't expect further volume growth rather, in Ukraine for the remaining part of the year.
Russia was already negative in the Q1 , and this is going to continue, so most likely the Russian portfolio will continue to decline, together with the Ukrainian for the remaining part of the year. The rest of the portfolio is pretty strong. Again, these are just quarterly growth rates. Bulgaria, 6%, Montenegro, Albania 6%, Slovenia 5%, and Serbia, Croatia 4%, Romania 4%. These are very robust growth rates. Honestly, we don't expect this. I mean, I don't think you can annualize these. Everyone expects some slowdown, potentially 2H of the year, maybe already,Q2. So far we have not seen that, so April remained quite strong.
Despite this kind of general expectation that there should be some slowdown in terms of loan growth trajectories, so far we did not experience that or have not experienced that. By this I kind of mean also April, which we can see now. Now, in terms of deposit growth, it was again, I mean very robust. Quarter-on-quarter 4% and 7% in Hungary. Given that in Hungary we have kind of 50% loan to deposit ratio, and the fact that loans were not growing and deposits grew 7% in one quarter, obviously that kind of describes this inflation of the balance sheet what I just referred to.
Which is actually, it is profitable especially the retail arm, the 5% you see here, because now the kind of short-term instruments or the kind of one week national bank deposit rate is 6.4%. There's a healthy margin on these retail deposits, right? Corporate deposits also quite strong and very liquid, so there's a lot of liquidity in the market. The rest of the group, I mean, it's more up and down depending on how we price deposits and how much we need deposits. I think the important part here you can see in Russia, Ukraine has actually increased. There's a lot of extra liquidity coming into these two banks and now we are really pricing down our deposits.
In Ukraine, we are first time ever lower than Sberbank in terms of deposit rates, and we continue to cut them and, deposits keep coming in. This is, it's actually a kind of previously unknown situation for us. And some kind of positive aspect in this overall very dire and sad situation that we have in Russia and Ukraine. Net fee income. Again, it was quarter-on-quarter negative, but if you look at the sources of this negative development, one is the fund management. I mean, fund management had a bonus payment, so they got a performance bonus in the Q1 and they always receive it year-end, and we don't know how much it's going to be. This is usually very seasonal.
This -2 in the fund management is due to that, and Russia was negative due to the low level of disbursements of new loans. Other than that, actually it was quite strong. You see Hungary +8%, Bulgaria +6%, Croatia +6%. If you take out Russia, Ukraine and we take out fund management in terms of fees and commissions, it was a strong quarter and we continue to expect strong performance for the rest of the year. Then in other income there was some noise. Other income line was quite high, but here there were different kind of technical items and the one-off gain. Really there was this -8 negative and the base effect +6, which kind of net out.
Really one of was this kind of trading treasury gain on Russian derivative positions, HUF 9 billion. That's a one-off. I mean, that was a result of the kind of volatility and the direction of the volatility during this period, and I don't think we are going to repeat them. So that's this kind of one-off element in the other income line, maybe up to HUF 9 billion. Cost, I mean, so far, okay, but obviously this is something to be watched. Quarter-on-quarter, that's a big decline, but that's due to the seasonality and usually seasonally high Q4 . I mean, during the year, we expect strong pressure here due to high inflationary environment almost everywhere.
As we've said, we are kind of committed to try to maintain the efficiency ratios at least at the level of last year. Now, maybe a very few sentences about Hungary, but a bit more granularity on the loan growth potential. Here, I think what important is this kind of applications for mortgages, because mortgage growth was not very strong. Year-on-year, it was still strong, 23% year-on-year growth. What really was strong is the annual applications. Maybe if you just kind of jump to the next page, you can see that there's this new structure in Hungary, the Green Home Programme, which is a subsidized structure for new developments and subject to very strict environmental requirements to be fulfilled.
There was a huge application, quite huge application level in the Q1 , and these loans were not yet disbursed. Disbursement amounts were, you can see, like 10% of the applied and contracted volumes. That means that this creates a kind of backlog which will appear in the disbursed amounts throughout the course of the year and maybe longer.
That's just to suggest to you that there's some kind of reserve here, at least in the mortgage growth numbers. But kind of cash loan was weak. Cash loan growth and consumer loan growth due to this kind of one-off windfall from rebate to households.
The baby loan disbursement continued. I mean, it continues to the end of this year, but still strong and we have high market share. Again, it's despite some changes in the structure, it's still very profitable. Corporate was rather not very active, put it this way. I think corporates are kind of waiting in a somewhat waiting mood just to see, in terms of new investments, where the trajectory of the situation is going to lead. So there's some. I think there might be, on a corporate level, a somewhat bigger slowdown, at least in Hungary, than we originally expected. But all in, it's still grew 1% in the Q1 . Then ESG remains a very important priority for us.
We continue to work on these goals and strategies and the final page is related to the guidance and we kind of carefully worded some changes here and there, as you can see. Again, it's primarily the without Russia and Ukraine part of the group where we can be, I think, more specific and where hopefully these sentences have kind of higher probability and higher relevance. I mean, we actually applied slight changes here and there to the wording, which I kind of have some message or some information value.
Again, based on the kind of Q1 3% growth where Hungary was unusually muted due to this one-off event, we think that it's possible to have an annual performing loan growth close to 10%. Net interest margin year on kind of year on year basis should be quite similar. Here, again, there will be some improvement in Hungary, as I already kind of highlighted.
The real positive sensitivity now is to the euro, to the euro rate. Should the euro rate environment increase and should that kind of filter through the other kind of proxy Eurozone or quasi Eurozone countries like Bulgaria and Croatia, what we have in the group, then there's some tangible benefit expected from the euro rate increase.
To be very specific, we expect kind of every 10 basis point increase in the euro rate environment to be equivalent of HUF 2.8 billion annual NII for the group. There's just some kind of material sensitivity to the rates here. Cost efficiency, again, we try to be at least as good as last year, despite the fact that inflation is strong and there are strong inflationary pressures and credit costs. I mean, in our last indication here, we kind of expected somewhat higher level, maybe around 40 basis points. Now we seem to be more optimistic on this line after the Q1 and what we see in the Q2 coming.
In a kind of reasonably okay scenario, we can be around last year level, which was kind of 19-20 basis points. If all this goes through, then we should be able to achieve similar ROE than we did last year, at least 18% for this non-Russia and Ukrainian part of the group.
Adjusted ROE, obviously, because, I mean, with this very high one-offs that we already booked in the Q1 , obviously, there will be different bigger difference between reported and adjusted numbers. Having said that, we plan to conclude two acquisitions pretty soon hopefully in the Q2 . There might be some, I mean, obviously, they will have also some impact on even P&L impact, depending on how we.
How the purchase price allocation actually happens and comes out. As I said in Russia, to our best estimate and understanding, we don't expect further losses for this year. I mean, Ukraine is extremely difficult to predict. Kind of swift positive turnaround of events can substantially improve expectations. On the other hand, there are worse scenarios than what we kind of imagine, and they are almost as possible. Even if we proceed on this trajectory, what we kind of depicted here, just from the technical features of IFRS 9, meaning that if volumes move from Stage 1 to Stage 2, then we have to switch from one-year expected loss to lifetime expected loss.
There will be additional provisioning needs. It's actually quite hard to tell. For both entities, we have a strong assumption for going concern. I mean, we talked about this kind of deconsolidation scenario last time. I think the probability of these scenarios is less and less, at least coming from an economic rationale. We really don't see this to happen in Russia from an economic rationale perspective, and we are quite hopeful that this is not going to happen in Ukraine as well, and we actually believe that it won't. These scenarios we consider very low probability and very unlikely. To be frank, we might be wrong.
Disclosure, as usual, please take those into consideration. I think we can open the floor for questions and answers. Please, if you have any, ask your 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 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 Máté Nemes, UBS.
Hi. Good afternoon, and thank you for the. I have three questions, please. The first one is on the NII drop in Hungary. Thank you for the additional details on slide 10, I believe. You mentioned the 29 basis point NIM decline that was caused by the lower swap result. Could you confirm whether this impact is here to stay or at least could partially reverse in the coming quarters? The second question is on Ukraine, and NII in Ukraine specifically. Could you give us a sense of what percentage of clients are actually servicing their loan installments and what portion of NII recognized in Ukraine is it actually cash, and then what is accrual?
One of your peers reporting this week actually mentioned surprisingly high number of clients paying or willing to pay their installments given the horrible situation in the country. I'm just wondering if you could give us a sense of how this looks like in your portfolio. The last question is on the Russian government on the exposures, the RUB 102 billion or RUB 40 billion net basis from slide 4. Could you tell us the RWAs on those Russian bonds? Thank you.
Okay. NII drop in Hungary, the swap. As I said, we don't expect this to repeat. Actually it was like HUF 12 billion quarter-on-quarter minus difference. That was, I mean, kind of in NII terms, it was HUF 12 billion, the difference on the swap results from one quarter to another. We don't expect this negative to repeat. It was more or less one-off due to the. I mean, unless obviously we see another next six months, although that there's going to be as much movement in the kind of rates as we've seen during the last six months, which I think that's quite unlikely. I mean, in Ukraine, basically since we have an overall moratorium, so no one is obliged to pay.
Despite this, 62% of clients do pay voluntarily. It's higher in corporate and in car loans and somewhat lower in consumer loans. Car loans, almost 80% is paying voluntarily. Risk-weighted assets of the Russian bonds, I think, I mean, in the bonds which are in Hungary, Bulgaria, they are in technical default according to our category, so I think it's kind of 100% for the remaining. So it's PD one, and then we have an LGD, and the risk weight here is 140%, b ut we have a much smaller portfolio in Russia, and there the risk weight increases, I think, to 150 due to the rating. Here, for us, it's very confusing.
Actually, we don't fully understand the real status of these bonds. Certainly, the same bonds in Russia, you know, Russian bonds are traded with some discount tradable and there doesn't seem to be any kind of much issue around them. Those who are not in Russia, the bonds, it's pretty unclear what their actual status is and what type of payment can be received or cannot be received on these loans. We actually could not find out even for the bonds which we don't have, but those famous bonds which had to pay coupons months ago.
Then apparently, as far as we understand, the Russians actually initiated the payments, but it's not clear for us whether it has gone through the kind of global financial intermediaries, primarily the American banks. Here we are, somewhat in the dark, right? We decided, again, with the strong view from our auditors to consider them in default.
To be honest, we are quite happy if we receive rubles for these bonds and then we exchange them to dollars. That's how this situation seemed to be resolved in Russia. We had corporate bonds, dollar bonds, which were paid in ruble, and we could convert the rubles same day without loss. There was no loss on these bonds.
Honestly, I don't know what's going to happen, but I think we have been sufficiently conservative here. My personal opinion is that we are not going to have these losses on these bonds, or it's kind of unlikely to actually materialize these losses on these bonds. They mature in kind of 2005, 2006, 2007. They are actually longer maturity.
Okay. Understood. Thank you very much.
Thank you.
The next question is from Gabor Kemeny, Autonomous Research.
Hello. My first question is about Russia. Please, can you talk a bit more about your assumption that Russia is not going to be loss-making, going forward? I mean, I recall in the previous 2014, 2015 crisis, the losses spread out for a lot longer, I think maybe for 2 years. It sounds like this time you expect a much deeper recession than what was in 2014, 2015. The related question, now that you are showing very limited walk away costs from Russia, how do you think about the pros and cons of withdrawing from Russia?
Yeah, my other question is on the provision guidance, which you now guide for 20 basis points for the group ex Russia-Ukraine. I think it's down from around 40 basis points, which you estimated around the AGM. What has really changed? If you could comment on how much of the overlay provisions, macro overlay provisions do you have currently? Thank you.
There are two differences, two big differences to 2014 and 2015. One is the quality of the portfolio and the nature of the portfolio. I strongly believe that we have a much, much stronger portfolio today than we used to have. It turned out in 2014, 2015 that primarily the credit card portfolio was well, there were serious issues with that portfolio, right? So it was. We have learned from these mistakes that were made there in 2012, 2013, 2011, and substantially, very substantially improved our risk management in Russia. This is just a much more resilient and better managed portfolio. That is one difference.
The other difference is that, I mean, what we booked in the first quarter, in terms of actual risk cost and loss, I mean, we booked HUF 27 billion, right? I mean, this is the total loss what we expected for this year, right? I mean, in 2014, 2015, we didn't have IFRS 9, so it took longer for the risk cost to manifest, right? If you kind of think back to 2014 Q1 , we didn't create upfront provisions, right? It took much longer for the losses to manifest. Here, this is.
I mean, we don't see. I mean, if you look at the actual portfolio quality and the delinquencies and everything, there's not much there to see. It's not at all visible that this portfolio is going to materially deteriorate from what we have seen so far, right?
This is everything we provision. I mean, on top of the usual in Russia is this kind of forward-looking IFRS 9, which if we were back to the accounting regime in 2014 where there was no IFRS 9, then this HUF 27 billion loss would manifest probably during four, five, six quarters. I mean, this is the change in the IFRS methodology, right? This kind of front-loadedness of risk cost. I think these are the two big differences, right?
No, I hear you. Maybe just one follow-up on this. I think in 2014, 2015, we were looking at like HUF 200 billion of provisions over that two-year period. So that was just materially higher than what you had in Q1. That's what made me think about the output.
Let's see. I mean, Russia, in 2014 we had HUF 14.5 billion loss, and in 2015 we had HUF 20 billion loss.
Yes. True. I was.
That's like HUF 35 billion losses in two years. Mm-hmm.
Sure.
Here we kind of in one quarter we had 27. Now, there's always this kind of normal level of risk cost. There's a normal level of risk cost which comes anyway, right?
Okay.
It doesn't mean that we created all the risk costs for the next two years. Maybe we have actually recognized the kind of one-off loss for this year, at least, right?
Okay.
Given that in 2014 we had 15%... HUF 15 billion loss or less, it actually makes sense, right? I think. Now, I mean, the second question, the strategic conclusions. We are open, right? We are open to any discussion and we have some discussions. Unless we are obliged to do so, we don't want to fire sale something and destroy value.
I mean, it would not help anyone, okay? It wouldn't help our investors. It wouldn't help Ukraine if we gave a big kind of gift to Russia or Russian investors leaving an asset there for nothing. This, on our own, we wouldn't do, right? We like keep our eyes open and we consider different scenarios.
At the moment, from an economic perspective, we don't see the rationale to do anything. I mean, we don't consider this as a situation where we have to do something immediately disregarding the cost and the potential value destruction to shareholders. Having said that, we obviously comply with every regulation and sanction and very careful in the type of lending we do in Russia is directed to low-income retail clients, point-of-sale loans. So we will see, but we are less concerned about that, okay. We're much more concerned about the people in Ukraine and the.
how the situation there gets resolved as soon as possible, because I think that's much more concerning. What changed since the AGM? Yeah. I mean, we did this exercise, right? We ran up the models. We now run them kind of in a very detailed manner, and we upgraded all the GDP expectations and everything.
That exercise provided us the confidence to actually say that. Seeing the first quarter number, this positive HUF 15 billion release, this gives us the confidence to tell you that maybe it's going to be only 20 basis points. The difference is that we have actually done a very, very detailed exercise, and we made the booking of these provisions exactly based on these calculations.
I mean, in Russia and Ukraine, I think it's meaningful to talk about overlays. In terms of the rest of the group, we don't have overlays as such. All the provisions are allocated to each and every exposure. We don't have kind of overlay numbers floating around not being allocated anywhere. This has been a very detailed bottom-up modeling exercise and allocation of provisions, and provisions are allocated to each and every exposure, so we don't so much have overlay. In general, wherever we can be, we try to be more conservative. Obviously, the IFRS 9 approach, I mean, you have to have a view about the future, which by definition is not correct.
Based on that view, you have to build models, and you have to build in certain parameters, scenarios into the models. There's always a lot of room for judgment, right? The more conservative, less conservative, and so on and so on. We try to continue to be more conservative than less conservative, and in general, that approach results as an outcome, a seemingly higher level of provisioning than other banks do in the region, right? From this, we infer that probably we are more conservative. It's not that we have a half amount which kind of floats there, as an overlay. In Russia, Ukraine, it's different. Obviously, in Russia, Ukraine is kind of due to almost the.
I mean, the entire excess provision compared to businesses usually in Russia and Ukraine, again, is related to expectations which have not manifested. Then I don't know how you call them, overlay or just IFRS 9 provisioning. But I don't know. Okay, that's very clear. Thank you, Laszlo.
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 on your phone's dial pad.
Hello, this is Andrzej Nowaczek with HSBC. I have three questions, please. I'm sorry. I have to ask a follow-up question on the Ukraine NII. Can you please explain the accounting for loans under moratorium? You classify them as Stage 2, and I think there was a grace period until end April. The NII accrued in Q1 just looks too high to me. There was some spike in March. What could the NII be, more or less, in Q2?
In March and April, there was a kind of general moratorium, but only kind of 38% of by volume clients used that moratorium. More than 60% actually paid voluntarily. Starting from May, it's not an overall moratorium. It's case by case. In retail, we do it based on the income of the client, so it's more automatic and then it's case by case. But this is going to be the second quarter, so obviously that does not have much impact on the first. We will talk about this in detail when we talk about the second quarter numbers.
Starting from end of February up until the end of May, we had an overall moratorium and roughly 40% of the net interest income has been accrued but not collected, and 60% actually flowed in as cash. That was the number for these two months. We have not. Looking at the kind of end of quarter number, the classification to Stage 2 was not kind of one-on-one equivalent to whether they pay or don't pay in the moratorium. It was more like where the client is, where the business of the client is, where the collateral is in the country and what else we know about the client.
Based on that basis, kind of corporate case by case and retail basically by location. This is going to evolve. I think the approach and the methodology in after the second quarter, so there's we will provide MOL clarity. But again, for the part of the first quarter which we reported here, it's basically March, right? One month and kind of, well, also February, because end of February, those who actually paid end of February, we provided them a moratorium. So kind of HUF of March NII. Then roughly 40% of this was just accrued and not collected. Is that MOL clear?
Yeah. Thank you, László. Thank you. My other question is. It's just a general question. What are your thoughts on the likelihood of a recession in Europe, and how do you think this could affect OTP?
A general recession in Europe?
Yeah. Well, anything bad other than Russia and Ukraine?
I think it's bad enough. I mean, our GDP expectations for, at least for the countries where we operate are actually not... I mean, Hungary surprisingly, we expect 4.5%, for instance, for this year. And we actually revised it upwards based on the numbers what we see for the first couple of months of the year. Basically, even first quarter, first four months, we already almost have this type growth, right?
There was so much growth in the second half of last year and the first quarter this year that even if there's kind of little growth in the remaining part of the year, second half, the overall growth rate would be quite decent. Bulgaria, we expect 2.5%. Slovenia, almost 5%. Romania, close to 2%. Croatia, higher than 3%. Serbia, higher than 3%. Montenegro, close to 4%.
Albania, 3.5%. Russia, Ukraine, negative, and also Moldova, negative. I mean, Moldova is in a difficult situation. Now, the situation can deteriorate, but the negative scenarios we see are related to the war, right? Related to the sanctions as a reaction to the war. It depends how far and fast the sanctions go. I mean, obviously high inflation due to energy prices, due to food prices. I think this is difficult enough. I mean, I hope we can kind of collectively cope with this situation in a good way on the European level. Honestly, personally, I rather see upside.
I mean, I know that the kind of recent mood is that it's going to be a very long, kind of, protracted war situation in Russia, but there's I think there's still hope to conclude this relatively swiftly. Then a very robust kind of rebuilding activity can start in Ukraine. These external threats usually create, you know, a kind of sense of purpose and unity. I think this is something Europe badly needed, kind of purpose and unity. Personally, I hope that this is going to strengthen and give a new kind of storyline for Europe. I think that can be quite positive.
On that note, you think those EU funds will be frozen?
Sorry?
The implication of what you just said, we'd hope that the EU funding will be flowing back again.
Oh, for Hungary, yes. Yeah, I mean, if you talk about specifically about Hungary, there are two issues which need to be addressed and resolved. One is obviously the EU funds and the availability of EU funds, which is a must. The scenario without EU funds would be very dire and therefore I don't think this is really a likely one.
From reading the communication of the government and people from the government related to this topic, they have been saying that they don't see an obstacle to agree. There seem to be a commitment on the Hungarian side to get an agreement. Certainly, it is an economic necessity, I believe.
The other one is the budget deficit. I mean, we had an election budget last 6 months or 9 months, and there was some serious overspending, and that has to be amended promptly. But it's not undoable, so it's especially if they start early, then it seems manageable, right? These two need to be fixed. That's very clear.
Thank you. Then lastly, very quickly, can you confirm HUF 29 billion of Sberbank resolution charges will be booked in Q2?
28, yes. Now, that's the gross amount, HUF 28, what we have to pay out. I strongly hope that the net amount will be much less. It depends on how much they can sell the assets of Sberbank for. These are pretty good assets. The actual net amount we book might be HUF 0. It can be between HUF 0 and HUF 20 and -HUF 28. My guess is that it's going to be much closer to HUF 0 than to -HUF 28.
Okay. That's great. Thank you very much.
Thank you.
Thank you. The next question is from Ophelia Ramberger.
Hi. Thank you very much for the presentation. If I understood correctly, you mentioned at some point that you are going to conclude in the second half of this year two M&A transactions. One would be the Slovenian Nova KBM. What would be the other one?
It's the Alpha Bank in Albania, and maybe I
Mm-hmm.
Wasn't clear. I wanted to say second quarter, not the second.
Second quarter.
Yeah. Mm-hmm.
Do you see further appetite for potential M&A transactions if there are good opportunities on the market?
Yes. Appetite we have. Good opportunities we don't.
Okay. Thank you very much.
Yes.
Thank you. The next question is from Alan Webborn, Société Générale.
Hi. Thanks for the call. On that basis, is the sort of Uzbekistan sort of not gonna happen now or is it still waiting for, you know, to see the dust clearing and things to calm down? That was the one question. Just a little point of detail actually. In Romania and Montenegro, you refer to, you know, operational risk events in Q2, increasing provisions in both countries. I just wondered what an operational risk event was. Thank you.
Uzbekistan is on hold from our perspective. We talk to the seller that we remain interested, but in this situation, we are not in a position to make a commitment as such until we see how the war situation and the ramifications in Russia and Ukraine play out. Now obviously the seller doesn't have any legal obligation to wait for us, if they decide to sell, they sell. If they do wait, and if the situation improves drastically in Ukraine and well, primarily in Ukraine, we would like to go back to this. We still see the potential. We obviously, I mean, it's complex and given the recent events, it's even more complex.
The fundamental rationale, I think, is still there. Again, it's on hold and I can't. I mean, there's not much to say really on this.
Is therefore everything on hold other than the two acquisitions that you're expecting to complete? This isn't a specific Uzbekistan issue or-
No, no. We have
If we were talking about.
Yeah, I understand. Okay. Not everything is on hold. We actually have three small discussions or processes at the moment where we are involved. Uzbekistan is not so much the kind of initial prize, but the commitment, the equity commitment there. That's kind of sizable. If we were to do that, obviously. It's a much bigger kind of step and really a step outside our comfort zone.
Mm-hmm. Okay.
Doesn't mean that we stop doing everything else. At the moment, we are actually working on three compared to Uzbekistan, the small opportunities. As I just said, I mean, we do. We have not lost our appetite. Whenever something comes interesting, we will look into. Now, Montenegro, Romania, these are very different and both are very unfortunate. In Montenegro, our internal controls revealed kind of, I have to say, illicit activity in the bank, which caused loss for the bank and loss for clients. We reimbursed the clients totally and took kind of appropriate measures and reported to authorities and started procedures. That's basically fraud.
It's actually localized and so we believe that we kind of fully uncovered this situation and the impact is kind of fully reflected in the first quarter numbers. In Romania, it's a very different. That's another fraud, but it's basically a corporate case where we did everything according to the book and there's a dispute whether the person who acted representing a certain corporate client actually had the right to represent the corporate client despite the fact that all the documents which were presented to us in our understanding were valid. It's a legal case. In this case, we don't.
We believe we have not done anything which we could have done better. It's a kind of one, really one transaction, the corporate transaction. In the Montenegro case, it was an internal fraud, unfortunately, which we ourselves investigated, identified and took very immediate and very strong measures. Unfortunately we could not stop the losses, and we have to reimburse the clients.
I guess the question is, you know, in terms of your own internal control, you know, inevitably as a group, you've expanded significantly over a long period. I think you've shown us that in terms of, you know, whether it's integrating new businesses, you're good at that. I guess, you know, seeing two issues with fraud attached, however they're done in a single quarter, does it make you reflect on the regulatory, the internal control processes that you have across the group to make sure these things don't happen? Reputational and everything else.
Well, of course, they do, yes. I mean, whenever we have an operational risk event, we institutionally draw conclusions. I mean, both of these cases it has happened, right? Or have happened. We strengthen our kind of level of kind of defenses on a local level, and we try to draw as much conclusion for improving group general practices as well.
I think it's just pure coincidence that these two happened in the same quarter. There's no. Really, there's no. The two cases are as different as two events like this can be, and they happened in completely disconnected markets in a way. It's just pure coincidence that they happened in the same quarter. Thank God they.
These type of events happen quite rarely, so it's not that every quarter we have this kind of event.
Okay. That's fine. Thank you. Thank you for clarifying and telling us what's been going on. That's good.
Mm-hmm.
Better to know, so thank you.
Certainly, yes. Thank you for your question.
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. There is a question from Máté Nemes. The floor is open.
Yes. Thank you. Just had a follow-up question on Ukraine still. You mentioned that your macro assumptions assume about a 30% drop in GDP this year and a similar rebound next year.
Mm.
The general provisions, IFRS 9 provisions are obviously predicated on this scenario.
Mm-hmm.
I appreciate it's incredibly difficult to give sensitivities here, but how would the provisioning need broadly change, if that rebound next year was significantly lower, let's say 10%? Could you give us some sense on that?
I mean, directionally we would need MOL provisions. Losses would be higher. Yeah, we can run the models, right? I mean, numerically, we can calculate anything. This scenario, I don't have it in front of me, but it takes like. Thank God we have this kind of. For the whole group, we have a centralized database where everything is there on a kind of individual exposure level basis, and we can run these models relatively in a kind of an hour maybe or even less. We can calculate these numbers, and it's possible. I don't have them in front of me. I mean,
No, that's okay.
The range of potential losses is actually very broad. It's not just the actual GDP impact. Well, take a scenario which is quite bad, but at the moment seems possible that Russia occupies, I don't know, eastern and southern Ukraine permanently. How do you account for that fact, right, in terms of Ukrainian GDP?
Even the definition here is difficult, right? Because that part of the country is a loss to Ukraine. We would not be able to do any activity there. We wouldn't want to as well, probably, but we were not allowed. There's this technical event, right, that if kind of territorial control is lost permanently over a part of Ukraine, then technically, I guess that GDP content is lost. We also have to
Immediate sanctions would kick in, so we would have to write off those portfolios. That would be a one-off loss, right? I don't know how you can reconcile that with these IFRS 9 models. That's the other thing. I mean, we run these IFRS 9 models because that's what we need to do. You should not forget that these IFRS 9 models were developed based on a kind of normal cyclical changes in GDP.
I think the COVID situation was very clear, and I think it proved very clearly and obviously that the IFRS 9 models simply don't work in situations which are not kind of cyclical economic cycles, right? Kind of one-off external events. Like in 2020 we had a virus which the implication was very large GDP contraction in 2020, right? A very large rebound last year.
I think it was not just our experience that the IFRS 9 provisioning, what we made in 2020, was actually not needed. These kind of forecasted losses by the model based on GDP changes, despite GDP changing, according to expectations, the losses didn't manifest, right? It's just because these models have not been developed for these scenarios.
They fit to this kind of long-term economic cycle events when GDP goes up and there's a recession and then. When there's a war, that's completely different. Maybe I shouldn't say that, but I have strong doubts how well the IFRS 9 models actually can capture these type of situations. That doubt I have is based on the experience, what we and other banks had, during the COVID situation.
Therefore, what we actually do in Ukraine, and where I have much more confidence in, is really a bottom-up approach where we look at each and every corporate client and classify them given where they operate, what they do. And also we try to develop a kind of geography and war and kind of impact level of impact by the war rating matrix where we classify retail portfolios as well, and try to create a bottom-up stage classification which quarter by quarter reflect the actual situation. I think this is actually more reliable. Obviously it's hard to do in a forward-looking basis, right? We don't know how exactly the bottom-up approach will result in one or two or three quarters.
We can calculate what you ask for and we can send you the number, but honestly, I mean, I wouldn't draw too much conclusion from that. It can be.
I have-
Somewhat misleading, I would even say, right?
I appreciate it. No, I agree with you. I think some of these models are certainly not fit for accurately reflecting, let's say, forward-looking risk in a disruptive or not textbook type of normal cyclical scenario. I hear you. Thank you for the color. Super helpful.
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. There are no further questions, so I hand back to speaker.
Thank you very much. Thank you for participating. Thank you for interest. Thank you for your very good questions. I wish you all the best, good health, nice weekend, and I hope you will join us next time when we report the second quarter numbers. I believe it's on the kind of first week of first Friday of August, somewhere on the fifth of August. Hopefully can welcome you back then. Till then, all the best and goodbye.
Thank you for your participation. The first quarter 2022 conference call is closed now.