Dear ladies and gentlemen, welcome to the OTP Bank first quarter and full year 2021 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.
Okay. Sorry, I wasn't unmuted. Thank you. Good morning or good afternoon, depending where you are. Thank you very much for joining us today on OTP Group's 2021 fourth quarter and annual results presentation and Q&A hopefully. Thank you that you dedicate your precious time in these turbulent times of today, especially. As usual, we have this presentation on the website available. And also since we are doing it through Zoom now, you can hopefully see it on the screen as well. As usual, I will go through it but rather briskly, I guess, this case, because I'm sure most of your interest today is not around what we did last year. However, performance was really exceptionally good last year, I think.
I'm sure all of our attention now is on the tragic events in Ukraine and the ramifications and repercussions in Russia especially. Obviously this is where I'm sure most of your attention and certainly our time and effort is spent during the last two weeks. I will try to do my best to give you an update. We have modest number of slides on this, only one in this pack, but hopefully in case you have questions I will elaborate a bit more on the situation as of today in these two countries.
Starting the kind of usual part of the presentation, page two, highlights of our result last year, 60% after tax adjusted profits increased due to two factors, very strong operational performance, 23% year-on-year operational profit growth, and the moderation of risk costs after the spike in risk costs we had in 2020 due to the COVID situation. These numbers are not distorted by acquisitions so much because we did not acquire anything last year. There was only a divestiture back in 2020. Our Slovenian, very small Slovenian bank. Pretty much these numbers provide you a good reflection of what happened really. Terrific year, I would say last year. Very strong volume performance. You will see that our performing loans grew 15% year-on-year.
Also the margin started to normalize. Even if you look at the fourth quarter figures, net interest margin increased group level. That hasn't happened for quite long years. Now we have a quarter where actually there was an improvement in the NIM. Capital position, I think, highest ever. We have at least in terms of common equity tier one, 16.9% Common Equity Tier 1 ratio year-end. Obviously, this was boosted by the sale of treasury shares. If you remember, during the fourth quarter, we had a transaction where we sold around 4.5% of our treasury shares to an entity or 4.3%, something like that, or to owned by employees. It's a special vehicle.
Liquidity equally strong. Group level, 75% loan-to-deposit ratio. Strong liquidity ratios. In Hungary alone, we are sitting on more than HUF 9 billion equivalent of liquid assets. You will see that in fact last year, deposit growth rate was actually higher than loan growth rates. Deposits grew 16%. Given that this 75% loan-to-deposit ratio, that meant that we actually generated a lot of excess liquidity last year. In half terms, it was kind of HUF 1 trillion, the difference between deposit growth and loan growth. Going through some of the details, I promise I'll try to be quick here. Here you can see the overall consolidated accounting profit and the differences that we usually make as adjustments.
There's this usual item, the bank tax. We had this very specific situation in 2020 and 2021, the moratorium, especially in Hungary, and the accounting adjustment, the loss that we had to book due to these. Obviously this reflects the time value difference of the cash flows, because we do get back these cash flows which were suspended during the moratorium. The only difference is that it comes later in time, so therefore, time value went down. These were one-off adjustments last year and in 2020. Gradually we write back these into NII if nothing happened. Some costs related to the mergers and the previously accounted for PPAs in case of acquisitions which you have to amortize.
This is the number what you see here. Typically after the acquisition, as long as the merger continues, and that typically takes one or one and a half, two years, we put here all the costs related to the merger. Even after the merger, if we have a post-merge project, we typically put the additional cost of the projects on this one. If you look deeper into the adjusted profit, then obviously what you saw on the first slide reflects back here as well. Very strong 23%, but with that, with some adjustments to make it really kind of apples to apples comparison, it's 19%. With 13% income growth and, I mean, again, with proper adjustments, 8% operating expenses.
Especially I think the revenue growth was quite strong. The fourth quarter was especially strong. What we saw last year was a kind of quarterly acceleration in revenue growth, which was actually quite good development. Now if you look at the entity results one by one, then across the board we see improvement. I mean, it's not surprising. Obviously, the economic environment last year was much better than in 2020. Some numbers stand out, I think especially Serbia, where we finished the merger and now we started to kind of reap the benefits of the new unified entity, and it's performing very well. Croatia was particularly strong. Bulgaria, but also Romania. I mean at least year-over-year, but here is the.
For a kind of interim period, the focus here is rather growth and not so much profitability or profits, because now we try to execute this organic growth strategy in Romania. We continue on that. As you can see, Ukraine and Russia did incredibly well last year. This makes it, for us, even more sad and regrettable that these recent events seem to have a very strong negative impact on the earnings potential of these entities. Not so much about general total income, but maybe two thoughts about total net interest income. We can go to page seven now.
It was a strong growth quarter-over-quarter, especially in Hungary, but roughly HUF 7 billion, half was a result of, you know, kind of ALM transaction, which had one lag here, another lag in other income. If you kind of net the two lags, the impact was slightly positive. You have to keep in mind, as we said, put it in context here, that part of it was not kind of business related, but more technical. I think it's important to note that despite the profit improvement in Russia last year, in fact revenues, net interest income went down year-over-year because of lower margins of the operation. Maybe if you go to page eight, we can see the margin. This is what I mentioned at the beginning.
After so many years of declining margins, we had the fourth quarter last year showing some improvement, strongly boosted by the OTP Core, the Hungarian one. Here, as I just said, part of it is actually technical. It's not going to stay with us, but nevertheless it's positive. In any case, there's some improvement which we're quite happy about. Volume-wise, fourth quarter was strong, 4%. I would say strong across the board, especially Russia, Ukraine, again. Finally Russia started to grow. You remember, for quite a long time, I was explaining the kind of difficulties we had in terms of, our strategic positioning and so on and so on. I mean, the fourth quarter started to show signs of, some life in terms of volume development. Ukraine was extremely strong.
The rest of the group was also mostly strong. With all of these, we ended up last year with 15% group level performing loan growth, which is exactly what our last guidance was. If you remember after the third quarter, we said that maybe we could expect around 15%, and it was exactly 15% the number. Hungary was very strong, 19%. Consumer lending, housing loans, corporate. Here there was some bolstering by the moratorium. Basically there's a technical uplift on the growth rate in Hungary, three percentage points in Hungary and then kind of 1 percentage point group level due to the fact that we had this kind of large participation level, high participation level moratorium, payment moratorium, and that obviously had a positive technical impact here.
Even without that, I think it's quite an outstanding result. Again, Ukraine more than 40%. Last year, Ukraine was showing extreme. I mean, I think not extreme, but very strong overall economic performance. You know. If we go further, you see the deposit growth and maybe it's better to look at the annual one. If you move one more. Yeah, this one. Yeah. 16%, as I said, and then and almost HUF 3 trillion deposit growth in Hungary and foreign, and then almost HUF 1 trillion more than loan growth volumes. Our kind of deposit to loans liquidity gap increased, group level and some countries was exceptionally strong, especially Hungary here. I mean, in a way, it wasn't very.
For a number of years, we could not do much with deposits because of the very low yields. In fact, with this higher rate environment, we started to make considerable money on deposits. We're actually quite happy to see this deposit increase. Financially, because it's always good news, it shows the level of satisfaction usually of our clients with services of the banks. Now we started to make serious money on deposits, especially in Hungary, which was not the case for many years. We're quite particularly happy about this development. On page 13, you see the net fee income. Again, there are two events which technically moved the numbers down and up.
The downward was this kind of usual one-off payment that we have to pay for the cash backs refunds, for credit cards, and we always account for this in the last quarter. It came in as well in Hungary. Part of this, actually almost all the quarter-on-quarter decline is explained by that. Then the other quarterly development is the fund management fee, success fee. They did a good job last year, so they got a success fee. But on a year-on-year basis, 2020, they had done even better. Kind of year-on-year, there's a decline in the success fee. But overall, I think the net fee income growth was quite strong last year. That's just a reflection of very.
I mean, strong increase in economic activity and increasing inflation and basically fee income is related in our case mostly to transactional activity. Transactional activity is typically related to nominal GDP growth. It's not surprising we had such a good year, especially because 2020 the base was weak due to the first waves of COVID when there were serious restrictions. Other income. Again, as I said, there's this technical kind of other gross lag of the ALM position closing and changing during the fourth quarter. That's actually counterbalanced by revenues shown in interest income. Other than that, it's the other lines which was strong.
We included a couple of entities into the consolidation, like, we have a travel agency in Hungary, and then we were quite happy that the private equity kind of division of OTP, which is called PortfoLion, or Lion, started to show very good results. We have some strong contribution to profits coming from this activity, which was represented in the numbers last year. We have other entities which we consolidated at beginning of last year. Actually, again, we have this cost and revenues shown here, and other income and costs on the operational cost line, which you will see, that you have to net out in order to get to meaningful numbers.
Roughly half of this others growth was due to this kind of reclassification of some activities which we recently consolidated. Operating costs. I mean, in Hungary, we had a kind of relatively strong year-on-year cost growth, but part of it was due to some technical changes or kind of accounting methodology changes. We increased the provisions for untaken holidays, assuming that everything will be taken now. We also increased provisions for this kind of expected anniversary bonuses. If every five years we pay out kind of one month extra bonus to employees who stay with us long, that we reflected better in our books, and that resulted in a one-off in the fourth quarter.
Even without that, we had a 9% year-on-year cost growth in Hungary, which is certainly reflecting the high inflationary environment last year, plus the tight labor market what we have, and also the strong development especially in IT and digital, which is always costly. The good thing is that in some countries like Bulgaria, we continue to realize, as you can see from the year-on-year number, the kind of long tail of cost synergies. Serbia started to provide cost synergies, and Montenegro started to provide cost synergies. These are the countries where we kind of recently completed mergers. Then Romania had a rather high cost growth, but again, this is related to this kind of organic growth strategy.
On the others line, you see this kind of technical impact to the other, the negative lag of these other activities, which have some cost. A few words about Hungary and our position in Hungary and the whole market. It remains strong, I mean, obviously, and we achieved some, especially the year-on-year numbers, which you don't so much see on this chart, but you have to believe me. Cash loans and mortgage loans, I mean, especially cash loans market share year-on-year improved a lot. So, we were quite happy with our relative performance, not just the absolute performance last year. Again, importantly, I mean, the household savings market share continued to be kind of stable and strong.
As you can see the next chart, we have remained very active in distributing this kind of policy subsidized structures in Hungary for retail clients. Obviously, these are very decent profitability products and market share tend to be higher than in kind of some other products. This is a strong focus of us. We always try to be available for the whole network for our clients day one when they are available, and then make it very convenient and easy for clients to use. Maybe that's the reason that we tend to have a much higher share. There's a Green Home Programme. That's the most recent one. It started in October last year for housing loans, subsidized interest in case the home is energy efficient. It's very popular.
We kind of continue to be very active on this front. In terms of corporate, likewise, last year was, I would say, exceptionally good. I mean, you can see our market share improvement in terms of kind of year-on-year growth. This was the strongest. We went up from 16.6% - 18.6% in terms of market share of corporate loans. On this chart you see the long journey where we started back in 2008. This is really this kind of redefinition of our footprint or profile in the Hungarian corporate continues. I'm quite happy to see that, and it's a very kind of strategic move from our perspective.
This was also supporting this good performance by being strong, stronger than in some other products in this kind of subsidized schemes which came from the central bank, the Funding for Growth Go program, which has already been discontinued but was still strong last year, and the newly introduced Széchenyi Card Go structure, which is a kind of SME targeted, relatively attractive, kind of working capital loan type of structure for SMEs. Then page 19, you see the current status or the year-end status of the moratorium. The moratorium was restructured, or the last phase started in October, where clients actually had to apply for the continuation of the moratorium. Surprise, surprise, all of a sudden, participation rate dropped substantially. It's not any more a kind of structural element.
It's still there and it's going to expire end of June, but it's no longer a kind of factor which strongly influences our numbers or something which should be kind of taken into consideration. In terms of developments, we have a few slides about digital. Obviously, COVID was very difficult and had negative ramifications. One aspect was, at least from banking point of view, positive that clients increased or accelerated their usage of digital channels. That really in two years we more than doubled our, for instance, the regular users of the mobile banking application. It's not just the kind of customer usage profile which shifted, but we also renewed substantially our services to the.
Last year we launched our new internet and mobile bank. It's completely new platform, new system, in-house developed, and a kind of radically different client or user experience. So far the feedback is overwhelmingly positive. ESG it really became strategic for us last year, and it was a very concentrated high-level management effort to structure this initiative or group of initiatives into a very solid and very well-represented organization and structure and detailed strategy and very specific actionable initiatives which should drive our performance on this front for the future.
There's really a lot of commitment and drive in the organization for achieving these goals and then to continue to improve in that front. I think this was a big push from us and actually the car started to roll fast. I think we will soon see further improvements, hopefully in our ratings and what we do will be reflected in this objective measures as well. If you go to the next slide. I mean, again, last year was good profitability, high nominal profit growth, strong volume growth, very strong, strongest ever capital position we closed last year and strongest ever liquidity position. On top of that, we continued our kind of more conservative provisioning approach.
Maybe more conservative than some of our peers, as you can see, especially for performing loans, Stage one and Stage two loans, we continue to provision as percentage of the volumes that we have considerably more like between 4 x and 2x more than some of our regional competitors. We did not last year release the provisions that we created for kind of in terms of additional conservatism in 2020 when the COVID situation started, kept this kind of higher level of provisioning last year. A few words about or details about capital and the Common Equity Tier 1 ratio development. You see the kind of requirements here as well. The requirements increased year on year.
We have, you may remember this other systemically important institution buffer, which used to be 2% prior to 2020. When COVID hit, it was reduced to zero, and then 2020, 2021 it was zero. Now it started to increase gradually. For this year it's 0.5%, next year it will be 1%, and then we go back to 2% in 2024. Our SREP ratio, Pillar 2 ratio also increased to 125% as opposed to the 117%, which we used to have for a couple of years. Okay. Much about last year and I will attempt to give you a kind of review of the situation in Ukraine and Russia.
We were really shocked by what happened, and it really surprised us. It seemed unbelievable that something like this could happen and that war on such a large scale and so tragic and war could break out in Ukraine. Obviously the situation is not easy at all. Our colleagues there who heroically maintain the operations of the bank. Services are available. Whenever a branch can be open, given the security considerations of our clients and employees, they open the branch. Still roughly half of our branches are open. Cash transactions are kind of available. There are certain daily limits for local currency and foreign currency cash withdrawals established by the National Bank of Ukraine.
Obviously, lending activity froze. Online internet banking is on and we do as much as we can. We do everything to service our clients there. Very positive thing that actually deposits in fact grew. Deposit volume, retail deposits increased. As you can see on this chart from February 23 when the war started and between March 3, 4% increased, and even yesterday we had an increase in deposit volumes. We try to do everything to continue to provide our colleagues there in Ukraine who are working under very difficult conditions to provide services and so far it continues.
Plus obviously we try to do everything as much as we can as an institution and also as individuals to support people who decided to leave Ukraine and the refugees. There's a large number of refugees already entering the country, and we try our best to support them. In terms of Russia, the kind of operational situation is obviously not under so much pressure. We operate all our branches as usual. Again, deposits are growing since twenty-third of February, retail deposits. Lending activity is very limited. We first stopped and then we restarted our POS lending, so lending activity very selectively, but we do provide some POS loans at the moment. It's the previous restrictions, the cap, the APR cap was released.
Obviously we provide these few US Dollar loans at much higher rate than we used to. This very punitive capital regulations were somewhat eased. The risk weights for our high APR, POS and cash loans were reduced, but still, they are much higher than like Europe or other parts of the world. That created actually a considerable excess capital buffer in the bank. It's like RUB 7 billion more, RUB 7 billion release in a way of capital requirements happened just because of this in rubles the last couple of days. What makes operations difficult in Russia is the financial intermediary sector.
We are primary retail bank there, but we do have a small treasury, and it's very difficult to kind of maintain the treasury operations with a central bank which only selectively or partially functions. Basic kind of instruments are not fully available. It's a bit of a difficulty and involves extra cost to manage the kind of small treasury portfolio that we have. We cope with the situation. This is I mean that's the operational challenge, so to say, at the moment in our Russian business. If you look at the financials, then I think it's worth to calibrate the size of our exposure to Ukraine and Russia. On this slide, you can see pretty much every important metrics.
Maybe the two most important one is the share from the group profits last year was 15%. In a situation where we are unable to conduct business in these two markets, and this is the kind of potential profit stream which we may lose. I think it's also quite important and interesting to know that if again, we are unable to sustain our operations and then have to deconsolidate these operations, then the impact on our capital, Common Equity Tier 1 capital ratio is what you can see here. 27 basis points for Ukraine and 116 basis points for Russia.
That means basically writing off these operations and also writing off the group funding, the gross group funding to these two countries that we provide. By the way, we don't fund the banks in these countries. In Ukraine, we provide funding to the leasing entity there, and the bank keeps dollar deposits in OTP Hungary. On this chart, you can see the gross and the net amounts. The kind of end of February figure was HUF 9 billion net. The gross number is certainly bigger than what we provide to the leasing company. That HUF 75 billion was included in this calculation, and we calculated the 27 basis point loss. That was calculated with the assumption that this gross funding would be lost.
In terms of Russia, the total funding. Here there's no net, so it's just the gross and the net is the same. It's HUF 50 billion equivalent. That's it, basically. That's the situation today. We do have some more exposure to Russia and Ukraine outside the country. We have some sovereign bonds. We have, on a kind of year-end number basis and exchange rate basis, HUF 88 billion equivalent of Russian sovereign bonds in Hungary and HUF 13 billion equivalent of Russian sovereign bonds in Bulgaria. These are kind of the maturities of these bonds are between 2025 and 2028, so kind of longer maturity instruments.
We obviously have clients who have kind of exposure to Russia and Ukraine across the group. Having said that, this is relatively moderate. All in all, we kind of screening the portfolio, we found basically around EUR 500 million funding or exposure to clients who have strong kind of business-wise connection with Russia that either they are kind of sourcing their raw materials come from Russia or they export to Russia. That's the portfolio which we kind of consider at risk. There are very few clients, I mean maybe one or two, who have kind of strong similarly strong exposure to Ukraine, and that's a much smaller amount.
Then there's obviously another kind of potential spillover effect to other countries where we operate of the situation in Russia and Ukraine. Now, that is obviously much more difficult to assess and calibrate. Naturally that depends a lot on what the outcome of this tragic situation is going to be. But the very obvious development is increasing inflation. We already see energy prices further increasing and also food and especially kind of grain prices increasing. Ukraine is obviously a large producer of foodstuff. So that is, I think, absolutely sure. I think that we should expect a higher inflationary environment, even higher inflationary environment, this year than in prior years.
That might have an impact on the economic environment in the countries as well. Then finally, guidance. First of all, I think we did well on what we promised last year. The ROE we said would be around between 18% and 20%. It ended up 18.5% with a conservative provisioning, and just as a footnote. We indicated maybe 15% growth of loans, and it indeed grew 15%. We started the year, if you remember, with kind of 10%, around 10% guidance, and then we gradually increased it. We ended up 15%. Then this year is obviously difficult, and we plan to say more concrete, to share more concrete expectations with you.
Obviously the last two weeks changed a lot in this sense. We would not dare to exactly pinpoint what the end game here is going to be in Russia and Ukraine. We simply don't know. The range of potential outcomes is huge. We decided it's better not to try to quantify the potential outcome other than showing you a very bad scenario on the previous page, and you kind of lose these operations and the funding to these countries altogether as a one-off. Then the question is what happens to the rest of the group? Again, the ranges of different scenarios is relatively big.
Therefore, I don't think it's very responsible to actually tell what the numeric expectation on the most important indicators is for this year, even for the rest of the group. I think we thought the best approach would be to start from a kind of status quo situation. Assuming that there's no material negative impact, negative ramification on the other countries where we operate of Russia and Ukraine. If that was the case, then we would expect a similar year this year to last year. The only difference is that maybe somewhat less loan growth coming from no moratorium.
From higher interest environment, which in some cases, especially in corporate lending, may kind of slow down loan growth. Regarding margin, again, we started to see some stabilization last year and we believe that this is going to continue. The margin environment we expect to stabilize and normalize. All the other indicators, our initial expectation was somewhat similar to last year in terms of risk cost rate, in terms of operating cost efficiency ratios, and therefore, not surprisingly these manifested, then we would have similar return on equity and profitability ratios and overall nominal improvement in profits.
Now, I'm afraid this is not going to manifest like this, and even if there's a peace agreement and truce made today, a lot of harm has been done and as we go, and if there's no agreement today, then tomorrow there will be more damage done and day by day, more physical and kind of structural damage is done. Therefore, there will be obviously negative ramifications for the rest of the countries. How much and exactly where is kind of hard to tell. If we look at the structure of these economies, I'm talking about OTP Group countries, excluding Russia, and Ukraine, then the economic links are surprisingly small. Typically we have like between 1%-3% share of Russia and Ukraine from the exports of these countries.
There are some exceptions like Moldova and Montenegro, for instance, but for the rest of these countries is typically between 1%-3% of their exports which are directed to Russia, Ukraine. The impact coming from loss of direct trade to these countries is going to be potentially moderate. Again, there are some countries, especially Moldova, we are quite concerned about. This is a country we recently entered, albeit with a quite small exposure and activity. Nevertheless, we see strong geopolitical risk and large dependence on especially Ukraine, but also Russia in terms of economic activity.
Obviously order of sanctions and disruption of supply chains and redirection of supply chains and potential kind of losses of other players coming from exposures to Russia. Higher costs of energy and food, and therefore higher inflation. All of these kind of point to a direction of negative impact on the economic development of the countries where we operate. Therefore, I'm afraid we are not going to have exactly as good results as we show on this slide.
Once we know the resolution or the lack of resolution of the situation, obviously we are going to be able to much better quantify and then do a new budget and so on and so on for this year, what we should and can expect. I'm sure you are interested on the dividends. We have this HUF 119 billion, which we promised many times to pay out, so we definitely would like to pay out this amount after 2019 and 2020. We still have not decided on whether we should or not, or should not, should and how much or should not suggest the AGM to pay dividends after 2021.
We are going to have a board of directors meeting and the whole management in two weeks. Then there we will carefully assess the developments related to Russia and Ukraine. Based on that assessment, we are going to formulate our proposal to the AGM. I think it's fair to say that it's quite likely that at least HUF 119 billion will be suggested to be paid. I guess that was all. The last slide is about the usual disclaimer. I think now especially this it's important because to be very fair, and I think it's not surprising, but we don't know what the outcome of this situation is going to be.
That was the kind of formal presentation. I'm sure you have questions, and I hope I will be able to give you kind of intelligent answers. Please open the floor for questions from the participants.
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.
Yes, good afternoon. Máté Nemes from UBS. Thank you for your presentation, and thank you for sharing details on Russia and Ukraine, including operations, indirect exposures and so on. That's very helpful. If you don't mind, I would start my questions first still Russia and Ukraine. I'm just wondering if you could share your thoughts or thought process on what developments or what change in the environment could make you conclude that you cannot operate in these countries anymore. What would be these conditions? The second question is still related to that. I think the chairman and CEO in the morning the press conference mentioned that OTP sees long-term role in these countries, but wouldn't take the risk of substantial additional exposure in these two markets.
I'm just wondering if you could clarify what exactly that substantial additional exposure would mean. Would you be willing to put in smaller amounts of additional intra-group funding? Or would you be even willing to recapitalize these businesses if need be? The last question is on your inorganic and expansion strategy. Do you expect an extended pause in line of acquisitions or an outright stop of the expansionary strategy? In light of this, if you could give us an update also on the potential acquisition in Uzbekistan. That would be super helpful. Thank you.
Okay. There are scenarios both for Ukraine and Russia where it's not our decision what we do, but due to sanctions either by EU or by Russia, we basically become unable to operate. This happened in Ukraine. In 2014, when Crimea was taken and when the Eastern Donbas and Luhansk part of these regions were taken, we were not allowed to conduct any business activity in these parts of Ukraine. So we had to write off every exposure day one. It can happen that due to EU sanctions, we were not allowed to operate in Ukraine. I hope this is not going to be the case because that obviously assumes a kind of tragic outcome to this situation.
I think we have to face reality that this can happen. I mean, in Russia, again, it can. I mean, either from the side of the EU or from the side of Russia, I think the relationship can deteriorate further. That's also a possibility. I hope it won't. I still, maybe I'm just, I don't know how rational it is, but I still see hope for a peaceful solution. There would be so much to gain for both countries from that solution and obviously rest of the world.
We have to face again that the kind of relationship between the EU and Russia can deteriorate to a level where either because of EU or because of Russia, we are not going to be able to operate there. In terms of our decisions, these are obvious because we don't have really a choice if that happens. Now, if there's a peace agreement tomorrow, and that peace agreement is recognized by the EU and kind of internationally, then miraculously everything can turn to very positive, and then we are obviously very happy to continue operations in both countries. Then there's in between, and these are the kind of two extreme scenarios.
In between, there are many other scenarios which are very difficult to kind of quantify and describe and pinpoint. Most of these banks are relatively. I mean, in Ukraine, we have a relatively small kind of leasing local currency corporate banking and consumer lending business. We don't have any mortgages. If banking is possible in Ukraine, and then there's some meaningful economic activity, not to talk about when, if there's a peace agreement, then we are quite happy to continue in Ukraine. I mean, Ukraine is, again, I mean, if you look at last year, Ukraine really very seriously started to grow on a sustainable and very promising path, I think.
That makes it even more sad, or I don't know how to say, or tragic what happens now. Recapitalizing Ukrainian operation, again, it depends on the environment. We would obviously not like to do that, but there can be a situation where you want to do it. If there's a tremendous growth opportunity and the situation is clear, and the status of Ukraine is clear, and there's full kind of international support for Ukraine in that situation, and then we see a large growth potential and value creation potential, then it can be a situation maybe we'll be quite happy to actually increase or recapitalize.
There can be other situations where it's just obvious that we do not create but destroy value. The situation is nothing like that. I mean, again, our bank is very liquid. Actually, liquidity improves. Capital, it's very well capitalized. The local capital, Common Equity Tier 1 ratio is, if we include last year profits, it's like 17%-18%. There's no indication that capital would be needed or liquidity would be needed, no. Likewise, in Russia, again, we don't have a single client on the sanction list. We provide our core business like 80% of the loan book is just kind of subprime consumer loans. We don't do mortgages. We do it in local currency.
Then we have a kind of smaller corporate business and an even smaller treasury. This even in harsh and difficult economic environment, this is usually a sustainable business. We have seen difficult environments in both of these countries. We continue to operate. In case of like in Ukraine, in Russia, again, we don't see any reason to be concerned about potential capital needs or liquidity needs because as I just said, I mean, the basically, one-third of the balance sheet in Russia is equity. We used to have excessively like, the risk weight for our POS loans used to be 388%.
It was reduced to 191%, but it's still kind of twice as much as we have in Europe usually, or the standard range. The cash loans, it used to be 338%, was brought down to 310% risk weight. Just this change released RUB 8 billion, I mean, RUB 7.5 billion equivalent of capital in the entity access capital. It's very difficult to see a scenario where we actually have to increase in the foreseeable future capital or liquidity. Liquidity is improving. Again, we have deposits coming in. It's kind of hard to answer this question because short term there doesn't seem to be any need to put their capital or liquidity.
I don't quite understand how, again, short term this would manifest. If things turn to kind of better or improve and then there's an agreement and settlement, and there's a bright future, and then if we have to put their capital because we are growing, and we believe in the future, and then I think that can happen. If we had to put in capital, let's say, because all of a sudden Russian regulator would decide to kind of double our capital requirements in order to kind of force us to increase capital despite the fact that doesn't seem to be any need for capital increase, that would be a different situation, right? We would understand it as a very hostile environment.
So far, I mean, to be objective, we have been treated fairly at least by the central bank and authorities in Russia. We don't see any kind of negative discrimination compared to locally owned banks. Yeah. I guess that's as much as I can say about this. M&A strategy, we have signed commitments to buy the Slovenian bank and the Albanian bank. We are going to proceed on our contractual agreement subject to regulatory approval, which we are still waiting for. These two are still likely to happen during the second quarter. Actually, Albania is interesting because they don't need any energy. They have this, the hydro power generated, and they seem to be.
That's the country which seem to be as much as possible isolated from this situation in Ukraine and Russia. Slovenia, not too much exposure. Uzbekistan, honestly, we haven't thought about that last two weeks. This was not. Again, Uzbekistan, there's no agreement yet. We continue discussions, negotiations. I mean, the last 10 days, this was not highest on our priority list to think about this. I don't have an answer to that. There's no commitment whatsoever there.
Right. Okay. Thank you very much. This has been very helpful. If I could just have one more follow-up related to capital in Russia. You mentioned that one hypothetical scenario where you would not be committed to recapitalize would be a regulatory imposed one should risk weights double or increase significantly. What about the situation when loan losses increase very significantly, and then perhaps that would eat into capital. What would be your thinking in that scenario?
We would have to make a decision, and that decision would be based on the future potential of the business and the amount which had to be committed, and the environment in which locally and internationally the Russian banking sector operates.
Understood. That's very helpful. Thank you for taking the time and answering the questions in detail.
Thank you. The next question is Hai Thanh Le Phuong, Concorde Securities. I open the line.
Hi. Thanks for the presentation. Just a couple of questions from my side. The first one would be on a happier topic. I was wondering if you could repeat your Hungarian interest rate sensitivity now, and I am curious whether it changed compared to your last call, or is it the same considering the higher levels of war now? Also if you could tell us your expectation on Hungarian loan growth for this year, obviously assuming no material harm stemming from Ukraine and Russia. My second question would be on, I think you mentioned during your press conference that you may be interested in Sberbank assets, and I was wondering if this is only true for Hungary or would you consider other operations in the region as well?
My third one, if you could repeat your Russian bond exposure, that would be helpful because I wasn't following. Thank you.
The interest rate sensitivity or earning sensitivity to the rate environment, now that actually the BUBOR is about 5% and the two-week deposit rate is about 5%. The best guess that it's close to zero, so we don't expect further gains from further increases because deposit prices will start growing as well. In terms of loan dynamics, in Hungary, we shared with you this kind of 10% group average, and in our without Russia and Ukraine, and in our kind of initial or original budget for this year, Hungary was somewhat higher, so kind of low teens. Again, it's likely that the events are a negative impact on potential loan growth. But I would be hopeful that we still can do at least 10%. Sberbank is gone.
It went into default, into administration. I think it was yesterday or two days ago. They are bankrupt. In Hungary, the deposit insurance fund is going to pay to depositors. Typically, it was a kind of retail and SME bank, so I think a large share of the deposits will be compensated and paid from the deposit insurance fund. It's over now here. I think in Croatia they were brought by. I don't know, but all of their assets were either sold or discontinued. In fact, this was at least the Hungarian event was triggered by the liquidation of the Austrian holding company.
That triggered at least the collapse of the Hungarian entity because the Hungarian entity had its liquidity in the Austrian holding company, which is also a bank. It used to be a bank. That went under administration first, and they didn't pay back the deposits, so that triggered a large capital loss in Sberbank Hungary and they went default. It's a small entity. It's like 1%. Still obviously painful and it didn't come in the kind of right time, but it's over now.
Okay, thanks. On your Russian bond exposure again, in total.
Our bond exposure.
Yeah.
Yeah. It was HUF 88 billion outside Russia, we have. I mean, this is kind of year-end exchange rates, so HUF 88 billion equivalent in our Hungarian books and HUF 13 billion equivalent in our Hungarian books.
Okay. Thank you very much.
We have some in Russia as well, but it's in the Russian banks. All right.
Okay, thanks.
Sure.
Thank you. The next question is from Gábor Kemény, Autonomous Research. I open your line.
Hello. One other question on Ukraine. Can you remind us if there are any credit and capital forbearance measures in place in Ukraine? And if there are, do these Ukrainian and Russian forbearance measures you mentioned impact your group consolidated financials or are these just relevant for the local entity? Then the other thing is just on the crisis again. Can you comment on the refugee situation? I mean, we see broadcasts, we hear anecdotes about many refugees arriving to Hungary and some neighboring countries. I wonder how this may impact the economic environment and the business environment for OTP. Yeah.
Just finally on a bit technical one on NII. You may have mentioned this, but an impressive growth in Hungary in Q4. I think you are flagging that half of this came from a swap result. Was this a one-off, actually? Thank you.
In Ukraine, the February loan repayments and interest payments were kind of delayed to March. In a way it's an overall moratorium, so to say, on every credit. I don't know how long it's going to be the case, but so far it's just one month. In Russia, I mean, the only thing I'm aware of is it kind of system-wise that they put a three-year moratorium on foreclosures. We virtually don't have any mortgages, so it does not apply to us, but it applies to those banks who have mortgages. I'm not aware of any policies regarding kind of restructuring or kind of policy level restructuring in Russia, and certainly we have not applied any.
In Russia, life seems to go on, right? The sanctions so far have had a very immediate and direct impact on the financial intermediary sector, right? Stock exchange, central bank, clearing house, basically treasury, especially money market instruments. That so far the kind of real economy impact is, at least from our perspective, related to our clients, so to say, especially our retail. Again, we are fundamentally a retail bank. Our retail clients have not experienced any shock because we are. I mean, exchange rate. I mean, our loans are in local currency. In fact, now that the base rate is like 20% . Typically the kind of better clients have lower than 20%, consumer loan rates, they seem to be.
I mean, we don't see worsening, so in delinquencies or kind of collection as usual. Yesterday, we looked at the kind of daily collection numbers and portfolio quality numbers, and so far we haven't seen any deterioration in the Russian business. In terms of NII fourth quarter, yes, or maybe I wasn't clear enough. In Hungary, we had this, we kind of closed some of the AI positions and swaps and they had an impact, a small positive impact, but the accounting was in a kind of gross way, so we had a positive in NII and a negative in other income. If you look at you know, the magnitude is roughly HUF 7 Billion .
This is a one-off, but if you net the two, then it's somewhat positive, a few HUF 100 million positive, right? You should look at both NII and other income in Hungary fourth quarter. You can see NII went up. Half of that increase was due to this transaction. Then you see a drop in other income, and most of the drop was like HUF 6 billion was related to this. If you net the two out, it's less than HUF 1 billion gain on that. That's clearer now. It was a one-off, but again, it creates somewhat bigger movement in these two lines. If you kind of net the two together, it's somewhat positive but rather small number.
Refugee situation, we have already more than 100,000 refugees from Ukraine who entered the country and roughly 20,000 per day. There's a very strong effort and a lot of activity going on to try to help these people, and this is done by the government, this is done by NGOs, and this is done by just individuals. I think I mean, we have two families in our which who kind of my fa- I mean in. Personally, we accommodated two Ukrainian families. Typically, families mean a mother and kids because men are not allowed to. Between age of, I don't know, so 18 years and I think 60 years.
The kind of military age they are not allowed to leave the country. We typically have women and children coming. A lot of people are trying to help, and a lot of people are actually going to the border because one problem is that they don't have transportation. It's basically housing and transportation. These are the first two immediate needs that they have. I think there's a kind of broad response from the society and from the government to do as much as we can. As far as we understand, most of these people don't intend to stay, right? They either want to go further west or obviously they would love to return because typically these are, again, not full families.
I don't know what the implications will be. Honestly I think it's I mean, what we again focus on is trying to provide as much help as possible. The bank itself, I mean, we are providing housing for the refugees and putting together a package, a financial support package, to try to help them. That's our focus at the moment. I mean, in a way, obviously. There are Hungarian-speaking people living in Ukraine and I think a big share of those who so far entered the country are coming from that part of Ukraine, the western part immediately bordering Hungary.
For them it's much more easier to work in the country or to settle if they wanted to. For those who don't speak Hungarian, obviously it's not a very easy kind of language for a kind of long-term. I mean, they're more than welcome I think. From a kind of practical or business point of view, one of the biggest problems structurally, Hungary is demographics and decreasing demographics. If kind of skilled labor increases, it's potentially positive. This is, I think, a side issue or a side consideration. Certainly that's not what we are thinking about now. We are thinking about how much we can help as organizations and as individuals.
Again, most of the people I know either helped or are actually accommodating people, refugees from Ukraine at the moment.
That's a very commendable support effort. Thanks.
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? Please press star six to unmute. The next question is from an attendee joined via phone again. I open the line. You will receive an automatic message about it. Please press star six to unmute.
Hello, it's Andrzej Nowaczek at HSBC. Thank you for the call. László, what would you say the difference is between the 2014, 2015 situation in Russia and Ukraine and the current situation could be in terms of impact on OTP financials? I'd guess more likely to be more severe now than then, right? Possibly also a bigger impact on the Russian business than eight years ago. I wonder whether you agree. Thank you.
Certainly, I mean, again, it depends what the outcome is going to be. Certainly the magnitude of damage so far has been higher, much higher than physical damage in Ukraine than in 2014, 2015. It was very kind of local in a way or contained in certain parts of the country. If you expect, or if you assume a negative scenario that this is going to continue and there's no resolution which is kind of globally accepted by all the parties involved and not involved, then obviously this is going to have a much bigger effect and a kind of longer-term effect. Again, we try to present the potential financial implication of a scenario like that.
On the other hand, if this is in a way this is how this situation is going to be resolved, which has been there unresolved now for eight years. Still, I think there's a chance for everything to turn for better. Let's say if there's a ceasefire tomorrow, and then the parties agree, and then a peaceful resolution is achieved and Ukraine can continue to grow and all parts of Ukraine or the ones which are the, I mean, are kind of, so every territory involved will have a legal status acknowledged and accepted internationally. It could create a much better growth platform for the country or the countries involved.
I don't know how remote that option or possibility is given the current situation, but if you believe in a scenario like that, then it could even improve, right? The outcome could be not as bad as it was in 2014, 2015. Again, I don't know how much we hope we can put into that scenario. What happened so far is much worse, obviously. I mean, the magnitude of the scale of the war is incomparably bigger than what was happening in 2014. Also the sanctions on Russia are a couple of magnitudes bigger than they were, which were introduced in 2014, 2015. In that sense, this is certainly a worse situation.
Yeah. Yeah. Thank you very much. Thank you.
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Hello. This is Robert Brzoza from PKO BP Securities. Can you hear me?
Yes. Loud and clear.
Great. I managed to get online after second attempt. Thank you for the presentation and for taking my question. It's on the cost of risk guidance that you had given for 2021, of course, without considering Russia and Ukraine. You expect more or less the same cost of risk in 2022 as in 2021, and here goes my question. Because to my understanding, 2021 was burdened with a one-off related to the extension of moratoria, which I would be expecting to reverse at some point once the moratoria expires. Does it imply that taking this into consideration, you actually expect on the remaining portfolio some deterioration in the provisioning outlook?
Secondly, if you could comment very briefly on the Hungary factoring unit, where we've seen in the past a positive contribution to the cost of risk, because as I understand from the report, this has changed regarding 2022 outlook. Thank you.
I mean, cost of risk last year was 30 basis points, and if you take out Russia and Ukraine, it was 19 basis points. Similar levels at 19 basis points, I don't think this is like kind of high, even plus or minus on the moratorium related provisioning, because indeed, that's the case. We had to provision extra in the fourth quarter for those loans who kind of remained in the moratorium after the last extension, because those clients actually declared that they had payment problems, so we had to worsen the stage buckets they were in, and that created the one-off provisioning.
We in fact expect the opposite second quarter this year, where we hopefully will be able to take out clients who are participating in the moratorium and who pay regularly for six months. We will reclassify them to Stage 1, and then we'll certainly use one-off release. So that's one technical impact which we expect. The other one is what you referred to that in the end of last year, we made another revaluation of the book value of the portfolio, which we have at factoring, which is a work out unit. We had to do a one-off kind of release, provision release, and increase the book value of these loans in accordance with the methodology expected by our auditor, new auditor.
Now the consensus is that it is more or less where it should be, therefore these one-offs are not expected. We still expect positive risk costs coming from these portfolios, but not in the way of one-offs. So there won't be any more kind of year-end one-off on that line. Now, having said that, I think it's kind of similar to last year, which means in this case, without Russia and Ukraine, something slightly less than 20 basis points. I think it's rather optimistic. Again, I mean, to be frank, we have not I mean the again, the last I mean, the war started last week, right? Since then, we haven't made a new budget, to be honest. It's something I mean, we focus on other kind of operational pressing issues.
This is kind of similar to last year, if you kind of read the way how we phrased it, was that assuming that the conflict doesn't exert a material negative effect on the rest of the group. If you believe that this is the case, then I think it's fair to assume that we are going to have kind of 19 basis points, 20 basis points risk cost for the rest of the group. Then it depends on your view how much negative ramification rest of Europe, not just the countries where we operate, but rest of Europe will have to undergo or suffer due to this special situation what we have. I don't think it's going to be zero.
I think it's already clear that it's going to be negative. Very obvious one is higher energy prices and higher food prices and higher inflation. I think it's fair to assume that at the end, we will have somewhat higher than 20 basis point risk weights for the rest of the group because obviously the economic environment is less favorable. Risk weights should be somewhat higher. Don't take this guidance as. These lines and these statements, which stand here as guiding information, they are based on an assumption which we don't know to which extent holds, right? I think we will have to wait to be realistic.
I mean, we could say we could tell it. I mean, it's going to be X and Z and Y, but I don't think it would be very responsible to do that. Once we know the type of resolution to the situation in Ukraine and the parameters of operation for us for the rest of the year or even longer, then we will be able to make probably better assumptions and forecast on how it's going to have an impact on our numbers. Right?
Clear. Thank you.
Thank you. The next question is from Siva Natarajan. May I ask the company, please?
Yes. This is Siva Natarajan from GW&K Investment Management. Hello?
Yes, please. Yes. We can't hear you. Please.
Yes, sorry. You know, thanks for your candid views on everything. Just to follow up on exposures, what are you seeing in terms of risks in the interbank markets in the countries that you operate in? And two, can you talk about your exposures in the derivative market like swaps, both direct and indirect to Ukraine and Russia?
In Ukraine, there are no swaps in Ukraine, right? Since 2009, they just don't exist. In Russia, we have a local money market book, treasury book, which kind of requires $200 million US dollar equivalent of position as of today, right? This is declining fast, obviously. We have to finance that position, but this is done locally, 100% locally. We already closed the counterparty swap relationships with Russia. What we do have still is this kind of line of funding, which is going to, not to the bank, actually, but to the
That's just loan, which goes to this SPV from which we issue the high-yield high APR loans, and this SPV is owned by the group, so it's not owned by the Russian bank. We have less than $40 million subordinated loan to the bank.
Thanks. What are you seeing in terms of the interbank funding in the different countries? Any risks developing there? I mean, I know you said Sberbank Hungary went bankrupt. Are there any impacts because of that? Not just that, but are you seeing risks develop because of potential further bankruptcies?
No, we have not had any exposure to Sberbank Hungary or other Sberbank entities.
All right. Thank you.
I think it's a very specific and given the situation, I'm not surprised that the given that Sberbank, I mean, listing was discontinued, I think, yesterday, but before it was discontinued, the GDRs, the Sberbank GDRs in the London Stock Exchange were kind of $0.10 or something like that, right? If and I'm, I mean, it's got I don't think it's a surprise that the subsidiary of an entity which is in that situation troubles. I think the way it was resolved, that's. I'm not sure. I mean, obviously, I'm only the kind of I don't know because this is the resolution board and the local resolution board who conducted the solution for this VTB Bank , international group.
I don't know how much coordination was done there and how much consideration was done, given the countries which were involved. From my perspective, I don't see much coordination, honestly. I said, as I said, the kind of trigger was, in case of the Hungarian entity, actually that the Austrian entity was discontinued and therefore. Now, I don't see any other banking group or local bank having similar type of problem. We don't have any other, as far as I know, Russian-owned kind of commercial banking activity in the countries where we operate, and I'm not sure about Western Europe. But certainly in the countries where we operate, VTB Bank was the only Russian-owned active commercial bank.
In the meantime, my colleagues tell me that we did have some exposure, which is under to the local one, but it's a low single-digit million EUR figure, so it's not a big one. But and then it's under settlement now with the local VTB Bank. So I think this is an isolated event with VTB Bank International. I'm not sure it was managed perfectly. But I guess the reason was that it is not systemic. Probably it wasn't systemic in any of the countries where it operated, and therefore potentially less regulatory or kind of resolution focus was provided. And I don't see any other financial institution or bank having similar type of challenges at the moment.
I hope it's not going to cause further events. At least I don't see anything in the countries where we operate.
Thank you.
Thank you.
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Hello, it's John from[audio distortion]
Can you hear me?
Yes, I can hear you very well.
Oh, perfect. Great. Great. Thanks a lot. Just one follow-up. If you could please repeat the exposure to corporates which are doing business to some extent with Russia. I think you mentioned the number earlier, but I somehow missed it. Please.
I can.
On the group level. The second one.
Okay.
The second one, if I may, on Slovenia, on this introduction of this controversial Swiss franc law. I think Nova Kreditna Banka Maribor
Exposure, I said, was around EUR 500 million. Kind of, that's across the group. That this is the exposure to clients where the substantial relationship is primarily to 95% it's Russian. Either exporting to Russia or sourcing from Russia.
Okay.
Sorry?
Is it maybe like higher allocation, I don't know, in Bulgaria or Serbia compared to other group members, right?
It's kind of evenly distributed. Yeah, Serbia, yes, to some extent, but it's everywhere. We don't consider them kind of high risk exposures, right? We don't mean that all of these loans will have serious issues. It's just that that's the exposure to clients. We have exposure to Russia, but or kind of strong exposure to Russia. It's not tremendously concentrated anywhere, right? It's across the board. Again, as I said, it's surprisingly. It's quite surprising. Now that we look deep into the numbers, typically, again, in terms of exports, it's between 1% and 3%, which is to Russia and Ukraine, to these countries. There are two exceptions, Moldova and Montenegro interestingly. Montenegro it's almost 8%-9%. They export pharmaceuticals to Russia.
They have a lot of, like, 25% of the tourists, incoming tourists are from Russia and Ukraine. I'm not sure that number is going to go up or down, they will switch to being permanent residents, that I don't know. I don't know if it's good or bad, but these are the two countries, and Moldova, obviously, to Ukraine. Moldova and also kind of Russian gas dependence. I mean, they already. I mean, the Russians increased their over the winter last year, their cost of gas 2.5x , so they already have problems, you know. In terms of the Swiss franc exposure, NKBM, which is still. I mean, we are very much arm's length. We have not closed the deal, and we are considered competitors, and we are competitors still.
We only know what they have publicly announced, and they announced roughly between EUR 45 million and EUR 50 million one off loss coming from the Swiss franc problem. Ours is much less than half based on our current estimate. As far as I know, there's no contractual opportunity to reflect this in the price of the asset.
Okay. Super. Thanks a lot. Thank you, László.
Sure.
If you have a question for our speaker, please click on raise hand icon to indicate or press star nine on your phone's dial pad. As there are no further questions, I hand back to the speaker.
Okay. Thank you again for joining us today. Thank you for the very good questions you had. I'm sorry that I could not necessarily answer everything to the level of detail, but honestly, the situation is so fluid and difficult to foresee what exactly the settlement and the situation will be that I think we have to wait somewhat to see how exactly it's going to phase out. Certainly, we are doing our best to help wherever we can help and to maintain the operations as much as we can. I wish you all the best with health and hopefully see you or have you on the conf call, which are going to do in early May.
We are going to have the AGM on the thirteenth of April. Very much hopeful that most of you who are representative of investors here will come and vote on the AGM. Till then, thank you again and goodbye.