Dear ladies and gentlemen, welcome to the OTP Bank Q3 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.
Thank you very much. Good morning or good afternoon, depending where you are. Thank you for joining us today on OTP Group's 2021 3rd quarter interim results presentation. We are going to conduct this event as usual way. I'm going to present and then we have Q&A. There's a new element we are going to introduce today that my dear colleague, Gergely Pókos, the head of our Green Programme Directorate, who is leading the ESG initiatives within the group, is going to give you an update. Actually, this is probably the long-overdue first formal communication to you about our ESG strategy organization, how we tackle this very important objective on a group level. I think we have made quite substantial progress.
This is a right time to inform you about what we are doing and introduce you to Gergely who's leading all these efforts across the group. Starting with the Q3 results and the first nine months results, I mean, we had a quarterly adjusted profit quite similar to the Q2. It was only slightly lower. And I guess it's probably better to give you some more detail on the coming slide, which shows the one-off items. We had quite some one-off items in the Q3, and the biggest one related to the moratorium. I mean, you have seen that this has been an important feature of the operations in Hungary since the COVID situation hit us in the Q2 last year.
There were some recent events in the Q3, but also in October, related to the development of the moratorium. First of all, in September, the government decided to extend it by one month, and that extension implied an additional one-off loss we had to book, and that was HUF 2.7 billion. Additionally, they also extended the program until end of June next year, but now with very different features than it used to be. Now clients, retail and corporate clients, had to apply for participation in the moratorium, and they had to declare that they fulfill the criteria which enable them to join the moratorium. We already know this number because they had the chance to apply till the end of October.
Altogether, 4.2% of the total Hungarian volumes applied for the extension of the moratorium. We'll give you some further detail on this during the course of the presentation. That also implied HUF 2 billion provisioning or one-off loss rather, accounting loss. It's not provisioning, it's actually an adjustment on the asset side and the loans outstanding. There was another measure by the government. Retrospectively, we had to recalculate those loans, the accrued interest on those loans which participated in the moratorium and were either credit cards or overdrafts. For these, we had to recalculate the accrued interest rates for the duration of the moratorium or the participation within the moratorium of these loans to a lower level than the original APRs.
We had to use the kind of a cash loan, unsecured retail loan, average level of APR for these loans. All these three together added up after tax HUF 9.2 billion negative adjustment. We had the usual acquisition or post-acquisition related charges. There was an adjustment in the share swap with MOL the Hungarian oil company due to changes in the expected dividend payments of these entities, and it was favorable for us in this quarter. If we move forward one more page, we see the details, the P&L without one-off. This is the adjusted after-tax profit, quarter being HUF 127.3 billion. If you look at the components, there are two important factors here.
One is that on a quarter-on-quarter basis, operating profits grew 10%, which is, I think, considerable, and due to the fact that we had strong income growth driven primarily by low volume growth in previous periods, plus a relatively strong economic activity in the Q3, which translated into higher net fees and commissions. That's the positive side. The negative side is that we had to book some of higher provisions in the Q3 than in the Q2. I might phrase it differently, that probably in the Q2 we booked an unusually low level of provisions.
In either way, I think this 23 basis points, which the year-to-date risk cost rate, I think on average, that was representative for the first three quarters of this year in terms of the level of risk cost what we have. Now year-on-year, obviously, if you compare the first nine months numbers, then the trend is different in risk cost because year-on-year there's a substantial decrease. The operating profit growth and the total income growth year-on-year is over more visible 20% year-on-year operating profit increase, which from our perspective, I think is a good result. I won't bore you, I mean, with presenting each slide.
There's a lot of detailed information on this which you might find useful. Only just highlighting some topics, maybe page nine, the net interest margin story. On a group level, it was almost flat. This is good because now is the Q3 where we are more or less a stable net interest margin on the group level. You see the kind of contributors to this quarterly 1 basis point decline. It wasn't very conclusive. Basically we have some noise. For instance, the Hungarian NIM actually declined, that might be counterintuitive when you consider the increase in the benchmark and the rate levels.
The thing is that the Q3 deposit growth was very strong in Hungary, such as the one quarter we had 8%. That meant that basically nominally we had three times as much deposit growth than loan growth. In a way, this inflated the balance sheet in Hungary, and that created this slight decline in the net interest margin. In some countries, notably Ukraine, we see already some improvement. The SK stabilized, which is good. Bulgaria and some slight erosion in countries like Croatia and Serbia and also in Slovenia. Overall, not a lot of excitement here on the NIM level other than that it's more or less stable.
Just to remind you that obviously the benchmark, the increase in the benchmark and the impact on the NII of variable loans comes with a time delay. It typically takes one or two quarters to price in the total effect of a given benchmark movement. Looking at the volumes, we had a quite strong quarter for 4% growth across the group. Hungary, particularly strong with 5%, led by consumer and housing loan growth. If you look at some other countries, like Ukraine continued to be very fast in terms of loan development. Russia started to show its potential, but in this quarter it was mostly driven still by corporate growth. We had a healthy 7% growth just in one quarter in Romania.
In the other countries, more or less good, respectable performance, which actually resulted in 11% year-to-date volume growth. This fact, actually, I mean, we had to somewhat reconsider or update the guidance we've given before, because the previous guidance was above 10% due to the fact that we already reached 11 in nine months warranted certain consideration for the expected volume growth. As you can see in our comment, if obviously, if this trend continues and if the trend what we see in the second and Q3 continues, then we can get the whole year to around 15%. Having said that, there's some level of uncertainty, especially due to the recent COVID development in the part of the world where we operate.
In fact, the situation is quite critical in Romania, in Bulgaria, and also start to be really painful in Ukraine and Russia. In these four countries, we are the actual statistics show the worst ever situation since the outbreak of COVID in terms of fatalities and people hospitalized. It's very difficult to assess what impact it might have on loan growth. I mean, marginally it's going to be negative, but how negative is difficult to tell. Maybe if August continues to go well, then we can get to this 15 level, following similar growth, what we had in the second and Q3s.
It might happen that actually growth rate slows down somewhat and then, we'll end up being somewhere below 15%. That's why we actually framed it in a way that probably around 15%. I think risks are more kind of downward than upward here just to the recent COVID developments. Deposits, as I mentioned, it is very strong. In the Q3, 6% nominally. Unfortunately, when I said in the Q2 that we reached a situation where nominal deposit growth was stronger than loan growth. This is no longer the case. In the Q3, we again had another quarter where deposit growth was much more than loan growth. Having said that, we have.
I mean, obviously this is positive marginally. We do make money on these additional deposits, but not with the same rate as additional loans. This kind of strong deposit growth slightly technically dilutes the overall margins, but obviously positive in terms of for our NII. Also we interpret this as a strong signal that our clients trust us and are satisfied with our transactional services and therefore continue to increase their savings, which with the bank. Okay, maybe a few words about the fee income, page 14. I mean, we had another strong quarter, 7%. We had the strongest growth in Croatia, where there is a. Also in Montenegro, which is not surprising given that these are the two countries with biggest exposures to tourism.
July, August, September were really strong in terms of tourism, tourists coming, spending, and therefore generating substantial transactional revenues in these two countries. That was a strong contributor to the overall, especially Croatian growth, to the overall group level improvement on a quarterly basis. Equally, Hungary and Bulgaria was strong transaction wise. Also in Hungary, we had a kind of base effect as well. All right. A few words maybe about Hungary. We seem to continue this now long lasting trend of outperforming the markets in Hungary, both in our retail and in corporate. Our cash loan market share continued to increase. Our savings, household saving market share continued to increase.
There was a small decrease compared to the Q2 in mortgage market share. Overall, we continued to perform very strong, I think, compared to the market in Hungary and in general, the volumes and demand growth seems to be quite strong. As you can see on page 18, these kind of subsidized retail products are still very popular. We continue to issue the famous baby loans, and we started to be very active in being the dominant player in the newly introduced home renovation mortgage loan and cash loan, and also in this kind of interest-free loan program for small businesses.
This is, all in all, I think, we continue to perform well in the Hungarian retail environment, and not just in retail, but also in corporate. If you look at the following slide, we can see that, I mean, our market share stabilized above 18% in terms of corporate lending. We continue to grow quite strong in micro and small corporates, 29% year-to-date growth. We are similar to the retail situation, when we talk about the distribution of the National Bank-sponsored pro-products, these refinance products, then we seem to capture a much larger share from the market than we usually do.
Our market share from this Funding for Growth Scheme, which was developed specifically to tackle the context of the COVID situation in Hungary, we had, for instance, 28% market share. This is just one slide about the moratorium participation. As you can see, this 4.2%. From now on, from November on, this is the volume-wise calculated participation level of 4.2% overall. It cannot increase, however, because there's no more new application or no way to enter this program. People cannot apply. People can decide to step out from the moratorium. This number is not going to be higher, but it may go lower till end of June.
As you can see, there's a difference in retail and corporate. In corporate, this is really small and minor. In retail, it's 6.8%. Even that 6.8% is substantially lower than the previous numbers. And I think here it's kind of obvious that actually most of the people, who participated before, A, did not need it, B, were not. I mean, if they had to be proactive to actually participate, then they probably decided not to. Even the 6.8%, that we don't think this is representative, in terms of clients who actually have potential difficulties to pay. Most probably less than 50% of this number.
Just a quick update on or some further information on our digital service usage in Hungary. This is probably the only positive, if any, of the COVID situation that the digital services usage have increased drastically in most of the countries where we see, but especially in Hungary. So for instance our mobile phone application usage increased 43% year on year. Now it's like we have 1.5 million active users in a population which is less than 10 million. This is, I think, a very good number. The digitally active number of customers increased by more than 10% in 1 year.
We have some very innovative features in terms of services where the usage rates have increased fast during the last year. We introduced our new digital banking and mobile banking platform with a drastically new and much improved user experience and service level, which seems to be also quite popular amongst our clients. Portfolio quality-wise, there hasn't been much development. The Stage 3 ratio continues to decline, primarily due to the very strong growth of the denominator. We have not really modified our coverage ratios. We have not released provisions or which we created last year. We also don't so much intend, at least not short-term, to do so.
Most of the risk was increased for our portfolio was related to various one-off items. An interesting page is the following. That's the capital position. The Common Equity Tier 1 ratio actually declined. This was due to the fact that we Call back the convertible bond, the ICES bond which was issued back in 2006 and lost its conversion feature in 2016. Since then, more or less it has been treated as Tier 2. Due to changes in EU regulation, it was about to lose its Tier 2 treatment from January next year.
Therefore lost its kind of usefulness in terms of being a capital element, and it's pretty expensive just for applying funding. We also don't need funding at all, or wholesale funding, so to say, at all. We decided to pay it back, and then we repossessed the shares. So we ended up having 14.5 million more treasury shares. This, and that actually resulted in this decline in the Common Equity Tier 1 ratio. Now, the interesting element is that basically in the Q3, the risk-weighted growth was just as much as the quarterly profit was.
Basically the FX, the risk-weighted asset growth due to FX changes were kind of balanced or canceled out by the similar changes in the capital. Finally, again, I kind of started to talk about this before, so there's not much we can say in terms of expectations for this year, other than that we think that our previous guidance related to profitability is still likely, assuming that we don't have any unexpected risk event for the remaining part of the year. As I said, if this kind of loan dynamics continues what we have seen for the last six months, then we are likely to get close to 15%.
I mean there might be some downward risk to this, coming from the kind of COVID situation in the countries where we operate. That was what I wanted to say. Also save some time for our second, equally important topic, the ESG strategy and kind of developments update, which is going to be presented by Gergely Pókos, my colleague who is leading the green projects initiatives in the group. Please, Gergely, join in and present these slides.
Thank you very much, László. It's a pleasure to be here. The reason why we wanted to have this update regarding ESG is that recently the bank's management decided on an ESG strategy for the banking group and also on the setup of an organization solution for that. I want to talk briefly about these and then share a couple of the recent highlights with you regarding the program. First of all, about the organization. Sustainable finance or ESG is a journey. It's much more of a marathon than a 100-meter dash.
That's why we thought it important to set up a robust organization to oversee the ESG transformation of the bank, making sure that sustainability is taken into account in all different levels of the organization and the transformation runs smoothly. The main elements of these are that the board is creating a new standing committee, an ESG Committee, chaired by one of the members of the board of OTP Bank. These members include, among others, all the Deputy CEOs. There's a representation of all parts of the bank. This committee has as a task to review all ESG strategy related issues. It meets on a regular basis.
It's supported in its work by an operating committee, a subcommittee to oversee the day-to-day operation and the progress of the transformation. This is the committee level. We've also included some changes in the actual working parts or executive parts of the bank related to risk management, business transformation and the control function. The risk management division has been given new tasks related to the definition and day-to-day management of ESG risks. The business transformation is spearheaded by my function with the task of driving the sustainability transformation across the banking group. We believe quite importantly, the tasks of the compliance organization have been amended. A separate ESG control function has been added to this.
As with all things related to compliance, reporting directly to the board of directors, they oversee that we actually, they control that we perform according to the rules and regulations related to ESG themselves. This is the organizational framework within which we will continue to work. We believe that this underlines the management's commitment to the sustainability transformation of the banking. If we go to the next page, this is a quick overview of the strategy that has been developed and was ratified by the management committee quite recently. A very short summary.
One-sentence summary of the strategy is as follows: OTP Group is aiming to be the regional leader in financing a fair and gradual transition to a low carbon economy and building a sustainable future through our responsible solutions. Now, as you can see, this is a positive and business-driven strategy. With this I mean with positive, I mean that, we want to underline our commitment that we want to finance the transition, not exit, areas of the economy, but actually help our clients finance the investments, they require to make the transition to a lower carbon economy. We also want to underline our approach that, we believe that, the transition needs to happen on a fair and gradual basis. It will not. There is no one size fits all.
We will need a specific approach for all the different economies and different parts of the industries that we're active in, it will happen over time. In line with the strategy, there's a defined implementation timeline and some KPIs. For the timeline, there's three horizons. Currently we are in the planning phase. We set up frameworks, develop our processes according to these goals and set targets for ourselves. I will talk about the targets in a second. The rollout of the transformation will happen over the coming three years. Basically from 2025 onwards, we believe that most of the parts of the bank will use ESG or will use these new processes as part of their business as usual operation. It will be ingrained in the bank.
It will not operate as a separate system. Now, in terms of KPIs, I should point out that on the right side of this slide, the KPI set are only for Hungary for the time being. We are working on group level goals. We define our goals according to the strategy, and their KPIs are set accordingly. Most importantly is actually building the green book, which translates into financing the transition to a lower carbon economy. By end of this year, we want to build HUF 230 billion green credits in our portfolio and grow that number by eight-fold by 2025. Again, this is just for the Hungarian operation. Now, by end of 2025.
Actually, this is already happening. As of today, we have five products on the market. Obviously we are working towards having a green product or a green product variant in all relevant retail and corporate segments in terms of lending in the coming years. Thirdly, we don't only want to talk the talk, we also want to walk the walk. We have made some strong commitments in terms of our own emissions. By end of next year, the Hungarian operation of OTP Bank will be carbon neutral, and we are working towards a carbon neutrality strategy for the whole group. I cannot fix a date for that just yet, but hopefully by the next update we will have a clear date set for that also.
Last but definitely not least, there is a lot we have to do in terms of disclosures and transparency. One element of that is that we have become signatories of the UN's Principles for Responsible Banking initiative, the first bank in Hungary to do so. In terms of the ambition, we have set ourselves a goal that by 2025 we want to be listed in the Dow Jones Sustainability Index, which is, we believe, quite ambitious, but we are working towards achieving that goal in the set time. Moving on. We are already being rated by ESG rating agencies, and there is some positive development on that front also.
Sustainalytics recently updated our score for 2021, to 20.3, which is an improvement of 3.2 to our last rating. Most of the improvement was driven by our strong performance system and governance structure, and the management score also improved. MSCI is holding our rating at A. They mainly underline our financial consumer protection and human capital development programs. We do invest a lot in teaching and financial literacy. Last but not least, since 2019, OTP Group is part of the voluntary CDP-Initiative we are disclosing in that system also.
The B rating is the current rating, we have submitted our survey and we are currently under review and I hope to be reporting an improvement on that the next time we give you an update. A couple of recent highlights of what we do on a day-to-day basis and how we are active on the market in terms of sustainable financing. OTP Mortgage Bank has been the first bank in Hungary to issue green mortgage bonds. The first issue was in August, just after the National Bank announced launched its program. An issue of HUF 5 billion, which was then followed in early October by HUF 90 billion.
We foresee further issues along the way. Besides this, we have also started to have refinancing on the retail with mortgages. I should say that the housing sector is one of the main drivers of the transformation of the sustainability transformation all over the world, but especially in this region. A lot of our activity is and will be around mortgages and real estate development in terms of financing. According to that, as you can see, this program includes a preferential financing for anyone who purchases a house that is of a high energy efficiency rating.
The program is now launched with HUF 200 billion by the National Bank, we hope that, or we expect we have a sizable market share in this. Moving on to the corporate side, obviously, sustainable finance has a lot to do with corporate lending. We are, we do have 4 products on the market as we speak in terms of corporate lending. We believe that, there are some priority sectors where most of the early change will need to happen. Now, these are renewable energy production, real estate development, agriculture, and electromobility. We are focusing on these sectors and providing preferential rates for credits in these investment in green investments in these industries.
Our current book size is, as I said, about HUF 150 billion for the Hungarian market, and it is growing. Last but not least, as I mentioned just a few weeks ago in October, we have become new signatories to the United Nations Principles for Responsible Banking Initiative. Now I don't necessarily have to introduce this framework to you, but we will be disclosing in this framework in the coming years. Next summer when we publish our new sustainability report, alongside with that together with the UN initiative, we will also publish our detailed report using the UNPRB framework in terms of our environment impact, environmental impact.
These were our new organization set up, the strategy for ESG and some of our recent highlights. I thank you for your attention and look forward to your questions.
Thank you, Gergely, for the ESG update. With this we reach the end of the formal presentation part of this conf call. I'd like to ask you to ask your questions should you have, and I'm sure you do have many very good questions either to me or to Gergely regarding the ESG initiatives.
Thank you. Ladies and gentlemen, we will now begin our question and answer session. If you have a question for our speakers, please click on the Raise Hand icon to indicate or press star nine on your phone's dial pad. One moment, please. The first question is from Máté Nemes, UBS. Máté, your line is now open. Please click on the icon.
Good afternoon. Can you hear me now?
Yes, I can hear you very well.
Excellent. Thank you for the presentation and taking my questions. I have a few. Firstly, on deposit inflows in Hungary. Seems like the majority, the vast majority of these inflows came from the corporate side. I'm just wondering if you could give us a little bit more color on this. You know, what's been driving this? Is this somehow related to some of the FGS program loans? Is this basically the result of perhaps corporates holding off investment type of loans and then perhaps still hoarding a bit more liquidity? When do you think this could change?
Second question is on NIM, group NIM development. For a few quarters now, I think, you've been delivering a very resilient net interest margin. If you could give us perhaps as an outlook what we should expect in the next two to three quarters, with the Hungarian rates, you know, rising in mind. In this context, if you could also provide perhaps the latest rate sensitivity in Hungary. Thank you.
Okay. There are corporate deposits go up and down, and there's some seasonality as well. Municipality deposits are here. In the Q3, we have seen quite large kind of, we call them treasury deposits, which are where our margin is very small. Large ticket are kind of few months term deposits with small margin. That's it. I don't see any tremendous regularity here. Usually, there's a seasonality and municipalities being strong in the Q3 when also in the Q1. There were some bigger treasury deposits from our clients, large corporate clients, where margins are very thin. The NIM development.
Indeed, the Hungarian, especially the Hungarian benchmark increase. The BUBOR is now close to 200 basis points to 3 months interbank rate, which is the base rate for our variable loans. This should have and going to have an impact, and most of that is still going to come. Part of that was present in this Q3. What happened during the summer is basically going to manifest more in the Q4 and Q1 next year. Assuming some further rate hikes because if you listen to the central bank comments, they suggested that the rate increase will continue, and therefore there will be some further increase in the reference rate.
I think the fair expectation in Hungary is that the NIM might actually improve slightly or somewhat during the coming quarters. Here, obviously the deposit growth or the difference between deposits and loan growth nominally does also have an impact. Having said that is not negative because albeit it's a small margin what we have on these additional deposits, it does somewhat dilute the margin. Expectation Hungarian NIM, potentially, small improvement during the coming quarters. Regarding sensitivity to further benchmark rate increases, we are entering a territory about 2%. We get to a territory where at some point deposits might start or will start to reprice, which has not happened yet.
Far, basically we have had 100% benefit from the base increase, or it has not certainly kind of built in into the whole P&L yet because of the time of repricing. Technically the variable loans either have gone up or are going to go up in terms of their their APR levels. So far we have not had to increase deposit rates. This is not going to last forever, and at some point we will have to start increasing deposit rates. This is kind of uncharted territory. We haven't ever been in this situation that we coming from a lower, a very low rate environment, which was unheard of in Hungary basically before into a kind of moderate rate environment level and how exactly deposits react in this environment.
Especially I'm talking about mostly about retail deposits because, I mean, my previous comments, deposit rates not going up is only partially true because large corporate deposits are benchmarked based, so there the cost of funding increased. For the bulk of deposits, for the kind of large retail current account deposits which dominate at the moment our deposit funding in Hungary, we have not increased the rates so far and we have not seen sizable movement from current accounts to term deposits. When it exactly is going to start and how much and so on, this is actually quite difficult to model.
We believe that it's still marginally positive if there are further increases in the base rate or in the reference rate, to say more importantly. Potentially the next 10 basis points would be another HUF 0.35 billion NII on an annual basis. The certainty of this is less and less. Certainly if it's a higher increase than 10 basis points, then we get into a territory which is difficult to model. I cannot tell you with high level of precision or what's going to happen with NII. Let's say if there's 50 basis point increase in the rate environment or a 100 basis point, it might actually.
100 basis points might actually be negative overall on the NII if the deposit rates started, or, and if kind of current accounts deposits start to move into term deposits. This is a very interesting question, and this is actually somewhat difficult to predict at the moment what would happen if there's a further substantial increase in the rate environment. I mean, if there's another 10, 20, 30 basis point increase, that's probably marginally positive. From then on, it's less clear. It was a rather long answer, but it kind of. I think it's representative of the difficulty to answer this question, Izzy.
No, absolutely. I appreciate the detailed answer. Just one clarification perhaps. The HUF 0.3-0.5 billion that you mentioned for the next 10 basis points, do I understand correctly that would already include or factor in some behavioral change, so some of the current accounts or current deposits shifting into term? Is that right?
Yes, but very small.
Okay.
Again, in retail, we have not seen this happening yet. What further complicates the situation is that actually retail clients have very high return, relatively high return investment opportunities. You have this MÁP+ and PMÁP, the retail government bonds in 1 year government bonds which retail bonds are very liquid, and is actually guaranteed quite high returns. These instruments have been available for years. Those retail clients who are kind of sensitive to returns probably have already invested into those as opposed to keeping their money on current accounts. But this we don't know 100%. It's a kind of difficult picture.
Understood. Thank you very much. Very helpful.
Thank you.
Thank you. The next question is from an attendee joined by computer. Hi Tamás Polgár, Concorde Securities. I open the line. You are able to talk.
Hi. Thanks for your presentation. Just one quick question from me. It seems that the participation in the extended moratorium in Hungary seems to be quite low. I was wondering if this means that in the Q4 we should see a drop maybe in Stage 2 ratio of loans. Also, do you think we should expect provision releases due to such a drop in the ratio?
Obviously, this is a very new information to us as well. It's the kind of fourth working day after the end of the application period. We're still analyzing the implications. Well, if we previously assign a loan to Stage 2, then we cannot reclassify them to Stage 1 immediately, right? There has to be a change in the because so far we have based our, and we continue to base our stage classification on behavioral models, what we have behavioral rating. Even if we see a rating improvement, there has to be a certain time period before we can change the classification or improve the classification. That's just the technicality part. I mean, our expectations, honestly, there's.
I mean, if we don't intend to release provisions, put it this way. Obviously, we have to look at the data and, as much as we will have room to for kind of decision or extra conservatism or less conservatism, we will continue to be on a more conservative side.
My expectation is that we will probably keep the levels of provisions what we have created so far. I don't expect kind of releases year-end. I'm sure the Central Bank will have something to say related to the new situation after the moratorium. We don't know it yet, but I'm sure they will have some guidance or expectation towards provisioning. I suspect they will be also on the more conservative side, but that we don't know yet. All in all, just because of the less participation in the moratorium, I don't expect provision releases in Hungary.
Okay. That's clear. Thanks.
Thank you.
Thank you. The next question is from Anthony joined by phone. I open the line.
Hi, it's Andre here. Thank you for the call. My question is on ESG. From what you said, it looks like you can do things in Hungary. You have KPIs for management, you have carbon neutral deadline, but not in other countries. Why not? Is there an issue here with a lack of legislation in some countries? Maybe differences in attitudes? I'm just curious. Maybe there's a big gap when it comes to ESG between your EU-based subsidiaries and those outside of the EU. Thank you.
Thank you very much. I think it's a fair question. You hit some of the elements where there's obviously a difference in legislation for EU and non-EU member states. Our subsidiaries in Croatia, Slovenia, Bulgaria, Romania, have the same legislation framework. However, the local legislation is somewhat different than in those outside of the EU it's even more complicated. However, setting the targets on the group level is not just down to legislation. It's more of an operative delay. We have just concluded the group level strategy and by translating and localizing that to the local economy.
As you saw in our strategy statement, we are aiming for something that is applicable to the local environment, to the local government, which is very much in line of what the UN charter for the PRB asks and demands of the banks. That translation to the local environments is happening as we speak. According to the Group strategy, we hope to have a Group level KPI set by end of Q2 next year. It's really just a timing related issue. We are strongly committed to realize the ESG program for the whole Group.
As you could see in the KPI, some of the initiatives are already. Sorry, not all the initiatives can be translated to group levels. We just need to add the different local initiatives. I hope I answered your question.
Yes. Thank you very much.
You're welcome.
The next question is from Gabor Kemeny, Autonomous Research.
Hi. A few questions from me. First one is on the growth outlook. I mean, looks like we are in a bit of a Goldilocks scenario right now. Interest rates are going up, and you upgraded the loan growth guidance yet again. I would be interested to hear your thoughts on the loan growth outlook for 2022. At what stage do you think higher interest rates could create a headwind for new lending? The second question is a little bit technical. Shall we model any recurring impacts from the APR adjustment on credit cards? The third one is on ESG. Fascinating slides. Thank you for sharing.
The, on the disclosures, are you sharing or are you planning to share the Scope 1 and Scope 2 CO2 emissions? Is there any color you can provide on ESG stress testing? Thank you.
Maybe I just quickly answer the ESG related questions. The current Scope 1 and Scope 2 emissions of the bank we share each year in our sustainability report for each subsidiary individual and also for the group. We will have an external audit on our achieving our carbon neutrality target. We'll disclose around that as well, how Scope 1 and Scope 2 will be reduced to zero in Hungary by end of next year. Regarding the stress testing, it's a very stress testing around ESG risk. It's a very complex and new topic for us. Not only for us, but we believe for the whole banking industry in Europe all together.
We are developing methodology and are in consultation with the central bank on its implications also. I cannot go into details about it at the moment because just for the simple reason that it's being developed. We hope to run the first tests in the coming months and maybe by this time next year we will have much more clarity around how that works. Thank you.
Regarding your two other questions. I mean, that's a very, very good question, what we should expect for next year in terms of volume dynamics, given the various factors, including the higher rate environment, especially in Hungary. Now, our guidance does not refer to 2022, right? This remark that we made was just related to this year. It's mostly due to the fact what we have seen so far. I mean, in nine months we had 11% growth. It's quite likely that volume growth will continue despite the rate increases in the Q4. Therefore, we think that the volume growth full year this year can be closer to 15 than 10. That does not imply much for next year.
We are in the process of developing next year budget, so we are in this very detailed bottom-up planning and top-down planning process, and we have not concluded that yet. It's actually too early for us to make sensible comments for next year. The situation is complicated, I think. It's not just the rate increases, it's also the energy prices and utility prices going up, the supply chain problems and so on and so on. Whether, depending on your view, whether you believe that this is just a very short temporary situation or it might be actually kind of longer and cause certain problems in economies and in certain sectors or specific players, it is actually difficult call to make.
We have not made any guidance for next year, I'm not going to do that today. We are in the process of making next year budget and the due course we will inform you about our expectations regarding 2022. This kind of volume communication what we made, that's purely relevant for 2021. The APR in credit card and overdraft, this adjustment which we had to make is only related to those volumes which participated in the moratorium and only for the duration that they participate in the moratorium.
If someone entered with a negative credit card balance to the moratorium, as long as the moratorium lasts, that balance is going to be, the accrued interest rate on that balance will be calculated using a lower rate than a usual credit card rate. But once this client exits the moratorium, the rate goes back to normal. This kind of adjustment of lower rate to credit card and overdraft applies only for those volumes who actually participate in any given period in the moratorium. When they don't, then it doesn't apply. It should not have, it should not have kind of, above moratorium ramifications, so to say.
That's all clear. Thank you.
Thank you. The next question is from Nida Iqbal, Morgan Stanley. I open the line. Please click on the microphone icon.
Hi. Thank you for the call. My first question is on inflation which you just touched upon briefly. With inflation running quite high across the CE region, are you worried about the impact on your cost base into 2022? Any color around that would be very helpful. In terms of cost of risk, it seems that this quarter was higher due to, you know, conservative provisioning, but also lower recoveries on OTP Faktoring. Is this a trend that we should expect to continue into the Q4? You know, how should we think about 2022 as well? Thank you.
I am worried about inflation and the implications on the cost base. I mean, there are some cost increases you cannot avoid, right? Utility. I mean, we are not energy dependent industry, but it does matter to some extent. The wage inflation, obviously. I mean, this is a big question. We expect strong even real wage inflation to continue next year. And that will be very hard to kind of balance or not to follow. We are in a talent heavy industry, and talent is scarce and expensive and increasing in terms of cost. We cannot afford not to have the best people who can contribute to our success.
Yes, I mean, cost pressure will be there next year and I think this is something we have to account for. I mean, this is obviously part of the intense discussions we are having at the moment internally in Hungary and across the countries in the group with our counterparts in the organization to set targets which are reasonable but stretched. But this is certainly a factor we have to take into consideration next year. The risk cost, I mean, again, what I said was that this is kind of 20-23 basis points what we had the first nine months. I think this is a better proxy of what happened during the year than the somewhat lower second and higher Q3 levels.
The portfolio quality is stable. We have somewhat lower, kind of revenues from factoring or payments from factoring. This is also related to the fact that the duration has been quite low during the last two years, therefore, they don't have much new, delinquent loans to work on. So far I don't see, I mean, portfolio quality seems to be stable, and I don't see much irregularities other than some noise in one quarter or the other, either positive or negative. As long as this kind of stronger GDP growth environment continues and actually somewhat increasing inflation and especially the wage growth and real wage is growing, that actually helps typically credit quality.
I don't see major problems coming. There might be some somewhat higher or lower risk costs in the last quarter. Typically, if you look back previous years and the year-end, we always look at every possible legal and accepted opportunity by tax authorities and auditors and regulators to be as conservative as possible within this framework. We will attempt to do that this year as well, but I've no idea what exactly the risk cost will be end of the quarter. I'm not sure whether this is the answer you were looking for.
We are not yet prepared to make any or express any expectations regarding next year and any guidance. That we usually do and in this case we will do as well, when we report about the full year results in early March.
Thank you.
Thank you. The next question is from an attendee joined via phone. I open the line. You will receive an automatic message about it. Please press star six to unmute.
Hello. I hope you can hear me. This is Robert Brzoza from PKO BP Securities here. I have a question regarding your strategic options in Russia, in light of, first of all, the regulatory changes, the recent letters from the central bank regarding the point of sale loans. How does it affect your business? That's my first question. Going further, obviously you're having great times there given the strong increase in lending volumes. However, on the NII, it's not that visible. I mean, it doesn't really translate into results because of the competitive pressures.
Second question is, what are you going to do about this? What's generally, the strategic idea, how do you want to have your business shaped in Russia going forward? Thank you.
Yes. It is something which. I mean, these questions are the ones what we are thinking about as well. I mean, certainly the latest regulation, I mean, almost every quarter we have a new, and more and more strict regulation regarding high APR lending in Russia. The new one actually gives the right to the supervisor, to individually, kind of restrict, or define high APR quotas for individual institutions. Honestly, we don't know yet how it's going to be implemented and what it's going to be, in practice.
It is clear that the regulator does not want or wants less kind of high APR lending volumes development and this is not helping our business. So far it has manifested in higher and higher capital requirements, which given our capital levels, group and local levels, we are able to provide. If there's a kind of direct regulation or direct limit of volumes to be generated, then obviously this is going to be a kind of hard wall for us and that is going to limit our activity. Having said that, we don't have any indication whether this is going to be applied and how it's going to be applied, and whether it's going to be applied to our operations in Russia or not.
Indeed, your observation is right that due to declining net interest margin, the volume increase does not necessarily or has not translated into NII growth. This has been the case. I mean this NIM compression has been happening there for years now, right? For 5-6 years. We started somewhere 18%, 19% net interest margin. Those years are obviously gone now. We are much more lower level. Yes, there's this NIM compression and further regulation obviously intends to even compress NIMs further lower. That creates a strategic challenge for us. We have been trying to answer these challenges different ways. Again, this is not something new.
I mean, this has been happening for years now. One clear strategic opportunity to increase digital activities and digital sales because it's a much more cost-effective way of distributing products, and therefore the APRs can be somewhat lower and proportionally and still make good business sense. Because what we have today is a quite expensive distribution channel. These kind of physically distributed POSs, obviously, due to commissions and the nature of the business, that it's a kind of countrywide, quite robust operation where we have to operate in order to sell these loans. The digital alternative can be much kind of cost-effective to manage.
That's the direction we have been trying to go, and this is the direction where we are going to strengthen in the future. The other thing where we have started is kind of diversifying into different products. I mean, I just mentioned that, for instance, big chunk of our growth this year was coming from car loans. Corporate activity also was strong during the year. It's a kind of moving towards, more towards digital and maybe diversifying more into other banking clients or products than just the kind of unsecured retail lending. These are the kind of current initiative, the most important current initiatives that we have. Indeed, this is a challenging environment.
In all other countries, I would say we kind of clearly see the opportunity and what we need to do there in order to be quite successful. In Russia, it's not that obvious, and we have been trying various scenarios. I mean, you might remember, eight years ago, I think we launched this in pure online bank, which we closed down some years afterwards. We have been trying different solutions in Russia. We continue to try. It's not that I have a very clear answer to that, but we believe that there are certain initiatives, namely digital and also diversification into different products and services which seem to work.
How, how much they're going to provide us in terms of opportunities in the future, that's that we don't know yet.
Thank you. It's surely a difficult question. Maybe just one follow-up. Could you possibly share what percentage of lending, of the unsecured lending in Russia, goes, let's call it via direct contracting with end customers? What percentage goes, in a way indirectly to retailers and then, to customers?
Yeah. I mean so basically the kind of point of sale loans are the ones. You ask about cash loans versus point of sale loans in Russia?
As I understood the intention of the central bank, they want to eliminate indirect lending without a direct point of contact with the credit provider. I'm simply interested if you provide such financing without the customer, with the retailer acting as a sort of invisible credit provider and without the customer signing the actual loan contract with you?
Okay. I mean, that's a more complicated question than what I can answer right now because we have our own agents and we have like third-party agents. We have to check that. I almost said I don't have the answer for that technically.
Okay. Thank you.
The next question is from an attendee joined via phone. I open the line. May I ask your name and company, please?
Hello? Can you hear me?
Yes, I can hear you. Yes.
Yes. Hi, this is Olga Bespalova from Bank of America. Thank you for the presentation. My question is about your small question. It's about your initiative in Asia. At the last conference call, you mentioned you were considering maybe a joint venture, a joint initiative in China. Could you please update us on that? Have you progressed in any way? What exactly do you consider now or do you possibly give up with this intention? Thank you.
There is progress, yes. We haven't given up.
Maybe you could give us the size of potential investment. I'm not asking precise number, but is it small? Is it large?
Small.
Okay, thank you.
Small with a large, potential gain.
What do you mean exactly?
I hope it will be a high return investment, but it's rather small compared to the kind of group and the typical acquisitions we do.
Okay, thank you. Are you in a position to disclose the area, any segment, or that's too early? Thank you.
Obviously, we consider consumer lending, right? Unsecured retail lending.
Thank you. That's all from my side.
Thank you.
Thank you. If you have a question for our speakers, please click on Raise Hand icon to indicate or press star nine on your phone's dial pad. Yes, there is a question from Nida Iqbal, Morgan Stanley.
Thank you. I just have a follow-up on Russia. We recently saw some press articles, talking about a potential acquisition, in Russia. Can you just comment on that whether inorganic, growth is part of the plans, for Russia? Thank you.
I mean, during the last 15 years, we looked into at least a dozen different opportunities in Russia. Whenever we see a potential acquisition opportunity, we typically look into those, and we have looked into many. We will continue to look into opportunities. We don't comment any specific opportunity until it becomes concrete.
Thank you.
Thank you.
Thank you. If you have questions for our speakers, please press star nine on your phone's dial pad or raise hand icon to indicate. As there are no further questions, I hand back to the speakers.
Thank you. Thank you very much for attending this conf call, and thank you for your very good questions. Next time we will have this session is when we talk about the annual results as usual in early March. I think it's the fourth of March, more precisely, and I hope you will join us then as well. In the meantime, I hope to have an opportunity to many of you. I wish you all the best, very good weekend and a very good health and stay healthy. I think this is the most important in these times. Thank you again for your interest to participate. Bye-bye.
Thank you for your participation. The Q3 2021 conference call is closed now.