Ladies and gentlemen, welcome to the OTT Life Second Quarter 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 Vlad Kouaventi, Chief Financial and Strategy Officer.
Vlad Kou, please go ahead.
Thank you. Good morning or good afternoon depending where we are, and thank you for joining us today on OTP It's 2021 Second Quarter Interim Report Thank you for joining us again. I mean, it's a pleasure to have you here In the middle of the summer, so thanks for all of you who decided to join us today. I mean, as usual, the presentation has been available on the website for a couple of hours. And we are also seeing some technical problem of actually showing you the presentation, but I hope my So we revert to the oil side.
So I'm going to tell you which page I am. Hopefully, you can follow it, but Recording for being able to fix not being able to turn the pages in the presentation on the screen. So basically, the Q2 was in line or slightly better than our expectations In many ways. And that obviously reflects in the Adjusted after tax profit of SEK 129, which is one of the highest ever. And I mean, this actually led to a half €246,000,000,000 profit altogether.
Now it seems Okay, good. It seems now we have the presentation here. And I think the probably the most interesting factor here is that In the first half of this year, we actually managed to increase the contribution of the foreign 2 years to almost 60%. So if you look at this page, the contribution from non Hungarian Antibis was 58 Percent. And that suggests that we have and there hasn't been any big one offs in December for the first half.
And lastly is that actually we kind of achieved a situation where our foreign entities Have more than 50% contribution to our profits and that actually is a result of the Acquisitions that we have done over the years and somehow creates more Diverse and distributed group in terms of geographies. There was one meaningful sizable one off item in the second quarter and that was the Related to the extension of the moratorium, 5,600,000,000 after tax. And just to remind you, this is the result of extending the moratorium from in Hungary from the end of June till the end of September. If we go further, Maybe one more question. So here you can see the P and R composition.
The fact that the profits More than doubled compared to the first half of last year. It's obviously not a surprise given that The risk cost is driving both periods as opposed to booking 130 Plus 1,000,000 risk cost last year in the first half. This year, it was only 18,000,000. So that difference Call was the biggest kind of difference in earnings overall. But if you look at the different lines, I think it's Quite positive to see that after all the adjustments and we really compare apples with apples, then the operating profit Without wireless and without viscous, obviously increased year on year 18%.
And this is kind of comparing exactly the same methodology, exactly the same group members year on year. And revenues increased 11%. And some of it, obviously, part of it is volume growth related, primarily the interest income part, but the good thing is that the fees and commissions Recovered, you probably remember that last year, there was the kind of more sluggish line in revenues that Together with the COVID situation and the negative impact on economic activity and intersections, we had somewhat lower Fee income last year and that's kind of quite nicely recovered this year. So on a quarterly basis, we also made quite a progress. On the fee line, especially 5% increase in revenues were Also, net interest income pulled up quite nicely and that is a weak link to the volume growth and the Stabilizing margins as we have seen.
If you look at the results country by country then, basically, we have the same Improvements everywhere due to lower risk costs, but maybe just to highlight a few, maybe in Serbia, you can See the nice results we had in the first half as we should compare to last year. Russia recovered very nicely in terms of earnings And return on equity and it goes together with Ukraine in terms of profit contribution and Ukraine is also very strong. So across the group, I mean, in each country, I think we can be quite happy with the results, including Romania, where the actual net income It's somewhat modest, I would say, but here we just to remind you, here we are in the middle of a strategic Kind of transformation process where we are investing into organic growth of the bank and that actually Resulted in kind of larger increase in costs at the first phase. We're not in a certain way, but we do believe that this is the right path to take and to Try to gain market share and reach a higher and better scale economy in the country. Let me figure out to Page 7, which is about the net interest income dynamics.
As you can see, some countries like Hungary was particularly strong, obviously due to the strong volume growth, but also the stabilizing margins or kind of Slide 4, the increasing margins. Ukraine, extremely strong due to, again, volume growth. And where we have actual narratives, these are on one side Bulgaria, Croatia and Slovenia. These are the either Eurozone or kind of close to the European countries in the group where we still see a very depressed Margin situation and Russia, obviously, due to the lower volumes, as we discussed it before, we probably Have been somewhat more conservative than we should have been and also more than probably the market. Therefore, We had some lower volumes last year.
Nevertheless, the profitability is actually We are very cautious lending activity we had last year. On Page 8, you can see one of the kind of good news that after this is that now we have 2 quarters when the Net interest margin stabilized on the group level. It started in the Q1 and now the second quarter Have the same impact. We have, well, obviously, Hungary where the rate hike started and we are in an increasing Great environment now, but also that's the case in Russia and Ukraine. So this is obviously helpful To stabilize the group margin, having said that, it's still not a spectacular growth.
It's rather Stabilization of the margin environment. If we turn our price to the volume dynamics, Then on a quarter on quarter basis, you may remember that the Q1 was less than 3% growth. The Q2 really accelerated and we had a 5% growth, which was quite strong across the board. Some really good numbers like Ukraine, Ukrainian corporate lending this year is extremely good. And Hungary, 7% growth, but also in Bulgaria, 4% Croatia, 3% Slovenia, 4% Romania, 5% Sudysir.
And these are just quarterly numbers, not annualized, but just in 1 quarter. And if you look at the 1st 6 months raise, Then we have 6% group level and 10% in Hungary. And on this slide, we actually added or Expanded our previous expanded on our previous The guidance, and I said that based on what we see we have seen in the first half of this year, assuming that these trends continue, It's very likely or rather we expect group level volume growth to be stronger 10%. So we expect additional double digit growth rates in performing low volumes. And we believe that the Hungarian dynamics will continue and like Also in the other countries, and additionally, we really expect Russia to start the engines in the second half of the year, and You should see the usual seasonal growth in the second half, especially in the Q4 in terms of voidings here.
So on this slide, we kind of updated the guidance and now we expect more than 10% growth. Deposit curve somewhat slowed down and this is something we are actually quite happy about. The second quarter was the first quarter for a long time When loan growth exceeded deposit price and given that group level we have 77 percent net loan to deposit ratio, which is obviously some optimists. It's not a really efficient balance sheet. We hope that a kind of new trend is starting with this quarter and that in the future, we are going to see Higher nominal growth in loans than in deposits.
If you look at the 1st 6 months in deposits, Maybe we can turn the page on. Then it's 4%, and we can still in the 1st 6 months, you can see the nominal growth of deposits is still higher In terms of fee income, again, this is a line where we See a very strong recovery compared to last year and even on quarter on quarter basis, there's a very good dynamic, 14% 12%, respectively. In almost every country and some countries, this is more related to the transactional activity, some things more related to inclusion lending activity. Well, basically, across the board, we see a very strong momentum on the quarterly and also in most cases on a yearly basis. So this is kind of catching up to the previous trend line or to the normal Previous normal in terms of fee income.
Other income is coming quarter on quarter. There wasn't overall A lot of new brands. We had some FX loss in Hungary that was Substantial, sir. So overall, this is a line which is a year on year actual result in 40% growth across the group. In terms of costs, we have obviously, we made here What kind of methodology changed?
We reclassified local taxes in Hungary to the overall taxes, and they used to be in OpEx, but you learned from our mortgage that This is the practice of the other banks in Hungary. So we followed the crowd in this sense, And we also believe that this makes our this change makes our numbers more comparable to any benchmark you might want to look at. So on these adjusted lines, year on year, we had 3.1% And if you look at some of the entities, We actually see year on year decrease in case of Bulgaria, Serbia, Montenegro, these are the countries where we recently finished The mergers, so this is still kind of cost savings coming from the merger cost synergies And maybe Serbia has something to look at because here, we just finished the merger of the 2nd acquisition in the Q2 of this year. So this is the country where further Sizable cost synergies are expected to come in the future. And as I flagged it before, you see Romanian Plus growing 29%, and this is what I refer to as our organic kind of strategic investment into Our activity is there.
So a few more detailed slides and information in the Hungarian Here, we are actually quite happy with the results, and we believe that Ultimately, the best measure of performance is market share and market share trends, whether it's growing or decreasing. And as you see, We are basically historic highs in terms of market share in new mortgage production, market share in new The cash flow on production, market share in household savings, they all increased in the overall That's maybe not historic, guys, because we in the 90s, the GPO was really Even more dominant in the market, but clearly, for the last 15 years, these have been the largest levels of market share. And if we go further into details here, This is partially due to the fact that we have been very active in channeling the different Type of subsidized structures, which are available to retail clients in Hungary to the actual Users, the actual clients and that in all of these structures we have for acquiring market shares, even higher market shares and Usually in the product categories. And that is obviously related to the I mean, Level of trust and also obviously the accessibility and the availability of OTP having this Very dominant multichannel coverage of the market in Hungary.
We're still very much Live and operational strong branch network, what we have across the country. We have a similar situation in corporate as well. I mean, our market share this year continued to grow. And if we take a kind of longer historical perspective here and compare with, let's say, 2,008, 7.5%, It has been only organics, where we have kind of 2.5x higher market share than we had 13 years ago and it has all been achieved organically. And again, in the specific Structures targeted or kind of subsidized either by the Central Bank or By other means in Hungary, we tend to be very active.
So we have 20% market share In the funding for growth new program, funding for growth program, which is designed to mitigate the negative impact of the COVID situation, especially last year and for our half of this year. We have also been very active in micro and small Corporate lending to pretend here in companies with 26% growth year to date, and this means that what the trajectory, what we created last year actually continue.
This is
relatively strong volume dynamics compared to at least And last 6 months with very modest kind of portfolio deterioration. If you look at the stage three ratio, it's actually declined. Obviously, the reason for the decline is the increasing denominator. But nevertheless, we are down to 5.4%. Stage 3 ratio, there wasn't so much change in the Stage 2 ratio during this year.
And also the coverage is, say, more stable. And we like to believe that we have been quite conservative in our provisioning. And if we compare Our coverage ratio is in Stage 3, the nonperforming board in Stage 12, which is back into the performing portfolio To some of the other regional players, and we can see that indeed it actually reflects in the numbers. Moratorium, which was a big thing last year, it's still a big Same in Hungary, not in any other markets. All the other markets, the moratoriums have been placed there, closed down.
And I can kind of safely tell all the potential ramifications negative and positive I've already built into the portfolio of qualities that we can observe. So the only exception is Hungary, where I saw the presentation. I said, we are perfectly aware that it was even extended from the end of June At the end of September, participation is down to 28%. It's lower in retail, retail at 49% in corporate 2015. And it's still an opt out structure, so everyone is in the moratorium on this.
So far, again, I mean, this results in And one off losses of the book, which relates to the time value of money, so it's not a in a way, it's not a nominal Revenue loss, it's a time value loss that we have newly booked them. And the underlying portfolio quality, we continue to monitor very closely. We have loads of information about these clients in Hungary in terms of their behavioral characteristics, And we continue to monitor and rate these customers according to their behavioral characteristics, and we Regularly update, therefore, the Stage 1, Stage 2 and Stage Three classifications. So potentially the last because the equity, so we managed To further improve our capital position, the common equity Tier 1 ratio, Which in our case is the same as the Tier 4 ratio was at 15.9% at the end of the second quarter. The other kind of related news is that obviously, we've been part of the EBI stressed us out of together with other 50 ish European Banks and the we were number 12.
It's not a competition, but nevertheless, we were Quite content to see that in terms of the 3 years impact in the adverse scenario On the capital adequacy ratio, we were the 12 floors And that kind of reassures us that it's not just the ratios which are high, but The underlying resilience of the business model to external shocks is actually quite strong in European comparison. Some highlights about The macro expectation, we obviously expect this recovery to continue throughout 'twenty one. And even if there is another Potential wave of the pandemic situation, then we believe that it should not disrupt Fundamentally, the kind of growth momentum that we have built, especially in lending, Maybe just a reminder that this very strong 5% quarterly volume growth actually happened in a quarter when especially in April, May, The COVID situation was actually quite strong and quite serious, especially Hungary. And despite of this relatively stressed pandemic or health Situation, we actually saw quite active business activity and increasing demand for learners Finally, the guidance update. As I said, we updated We expected loan growth about 10%, and we also updated the or kind of It became more specific to the ROE guidance.
We used to say that we expect To be higher than last year, but now we are more specific. So we expect it to be somewhere the adjusted ROE to be somewhere between 18% 20%. And that's also probably not very surprising because the first half result was 19.1%. So this It's pretty much in line with where we are at the moment or where we were during the first half of this year. And obviously, that kind of implies that we expect the risk environment to be largely similar in the second half of this year than in the first half.
In terms of dividends, I mean, The €119,000,000,000 after 2019 2020, It remains and deducted from our regulatory So we intend to pay the share to shareholders, and we also, according to We're in line with the new regulations. We calculated for the first half, dollars 42,000,000,000 Dividends which we deducted from the regulatory capital. So altogether, now we have SEK 100 and 1,000,000,000 half deducted from our regulatory capital and capital ratios up to the end of June. So I think that's it. I tried to be kind of succeeding, isn't it?
It's summer. I'm sure you have very good questions, and I'm sure I will have some opportunity to further elaborate. So please, Operator, open the floor for questions.
Thank you. Ladies and gentlemen, we are now beginning our question and answer One moment please for the first question. The first question is from Ondrej Novaksev, Agency
First, I guess the acquisition of MKBM will dilute your ROE next year, plus you're generating so much capital that It will be difficult to sustain the current ROE anyways. So just a usual question, is there a big acquisition around the corner? And what are your thoughts on the dividend outlook beyond that EUR 119,000,000,000?
I mean, yes, I mean, if you But it also I mean, yes, the MKBM will somewhat dilute the group level ROE, but also it will dilute the cost of activities. So It's clear that we and those things go together, right? So yes, I mean, in the lower cost of equity, Lower expected return environment. We achieved lower ROEs, but if the ROE is visibly higher, it's very higher than the expected return, then I think we do a good job. And that goes in line with the risk kind of profile of the group as well.
So obviously, If we expand in the Eurozone country, which is actually quite stable and quite Kind of strong development path, then that's a different risk profile than some other group members. But then I think that's worth Okay. In terms of acquisitions, there's nothing more I can report on, nothing Concrete other than that we continue our efforts to secure further acquisitions, which deliver value for our shareholders and also for the clients who we serve. And Obviously, in case of MKBM, the deal has been struck and now we are waiting for It should be to approve to do and we expect that to happen somewhere end of Q1, beginning of Q2 next year. Further acquisitions, again, I'm we usually not talk about any Increased developments on this material.
So we kind of have to keep that custom. In terms of dividends, I mean, the EUR 119,000,000 Amount is related to 2019 2020. So And the dividend, which the suggested dividend for this year will be Kind of defined due course. I don't think I can say much more in this at this moment. The demand is EUR 42,000,000,000.
Again, this is according to the specific formula, which must be applied When a bank kind of accounts the interim profit into its capital ratios in case there's no approved dividend policy, Which is in SRK. So I think that's the answer.
Thank you. And on costs, well, congratulations on your performance in H1. But are there some Cost adjustments to be expected in the second half, such as salary hikes, some extra bonuses in December, just more spend on Marketing and Advertising?
Well, I mean, The good thing about recovery is that this increasing demand, increasing lending activity, more transactions, higher fee revenues. The downside is that inflation actually increases And wage inflation and the I mean, in fact, the labor markets are back to the Pre COVID level of tightness, so to say. So yes, I mean, we have to We can follow that and we have to remain competitive in terms of the wages that we pay to our colleagues In order to have the best time. So yes, I mean, certainly personal expenses are going to grow and We are increasing wages during the second half of this year. That's correct.
And But these are the kind of two sides of the same coin. So higher activity, more lines, But on the other hand, much bigger pressure on the cost side and that's But therefore, I think what we tend to look at is the cost to asset ratio. And if we even Compared to last year, I think we have kind of achieved quite an improvement also in the cost of income. Now the cost of income becomes more and more meaningful now that The revenue margin seems to stabilize, right? So that's again potentially another metric, Which is meaningful when comparing different periods.
But nothing else. Sure. We don't have any kind of big one offs coming other than the fact what we just mentioned that we have to follow the market The labor market trends and adjusted salaries of our colleagues.
Thanks. And very quickly, If I may, on Russia, Russian loan growth specifically, are you not concerned about the impact of the recent Heights risk weight hikes on consumer loan growth in the second half and into 2022?
No. I mean, this is In a way that can Directly improved competitive dynamics and maybe even pricing should require us to Allocate the necessary capital to the activity there. In fact, we are well capitalizing our ship. We actually have lower volumes than a year ago. So this is not a concern for us.
The question rather is Whether this I guess still a dominant sales Channel is the physical POS and our kind of cross selling engine Of credit cards and cash flows is built on this primarily physical POS Channel acquired customers, and this is clearly not the highest growth segment of the market. So most of our efforts are actually directed at the moment to somehow try to capture more New businesses from other sources rather than the physical POS. So those are the kind of Strong strategic initiatives that we pursue at the moment. And I hope that they will work, and I hope that we can actually get back to the A kind of expected level of loan growth because again last year we were probably Too conservative in our lending, which resulted in quite material decline in the portfolio. Having said that, this is obviously short term, very good for profits because it also resulted in a very good portfolio quality.
So in terms of returns and nominal profit, it's actually quite a good year, but we believe that we'll have some money on the table and we Did not fully capture the potential in the market, but honestly, we had a man a year ago I'll be back to ensure the COVID situation can develop the mission.
Thank you very much.
Thank you.
Thank you. The next question is from Sandeep from ComCast Securities. Your line is now open. Please hand your microphone and go ahead.
Hi. Thanks for the presentation. Just on the risk cost topic, coming back to Russia, You said that viscous was quite low in the first half of the year, and I think you already mentioned it because of the asset mix. And does this mean In the coming quarters or next years, we should expect a lower single cycle cost of risk and whether how much would it be? And my second question is also on provisions.
I saw that underlying risk costs were basically 0 In the Q2, but other provisions were rather high compared to the previous quarters. What kind of items were in under this line, if you could elaborate on that?
So yes, I mean, the Russian risk was raised, if that was your kind of specific question, It went down to 2%, right, which is I think we haven't had such a low rate ever, I think. So in reasonably good years, we had between 5% 7% risk cost rate in Russia. We think that this is the 2% is probably too low. So once we get back to the Kind of optimal volume growth and optimal lending level, then it should go higher in order to maximize The return, but it should, but at the moment, we think that it's not going to go Up to this 5.7 level, maybe it will kind of remain below 5, But certainly higher than the 2% that we have at the moment and which is the likely number for some more Period until we see a bigger loan growth in the second half of the year. Yes, the The other risks are related to some provisions we made for legal claims, Some off balance sheet risk we've covered, and it's coming from more than a place basically.
Okay. Thank you.
Thank you.
Thank you. The next question is from Anthony joining the line
Hi, thank you for the call. I have a few questions. So firstly, on the cost of risk, it's been, of course, very low in the first With positive risk costs in Hungary, should we expect this how should we think about the trajectory looking into 2022?
I mean, last year, we provisioned quite conservatively. Or rather, what happened was that we quite conservatively increased The Stage 2 volumes, so we classified a lot of loans into Stage 2. We have not reversed these classifications. We are still in Stage 2. So the extra Kind of provisions we created last year are still there.
And obviously, if The situation continues to improve and then at some point And these results, which are now in Stage 2, will continue to perform. Then at some point, we will revise This classification and reclassify them back to Stage 1, which will ultimately result in some provisional releases. So assuming that the recovery continues and there won't be a kind of turn back or a fallback or whatever, Then at some point or maybe not at once, but more gradually, but certainly during the course of 2020, we should see Some positive effect coming from reclassification back to Stage 1. So that's one element. The other element is just the underlying risk environment, which at the moment is quite positive and supportive.
And Honestly, I don't know how long this is going to last. At the moment, there's no indication when it should Yes, right. So we don't see any. So if you look at our GDP growth expectations, It will be quite I mean, higher typically for countries around 5% higher next year, Similar around 5%. So we expect a very kind of positive environment and relatively Fast growing economies and sooner or later, I mean, the COVID situation will end and some of the specific industries which were hit hard like, Foreign tourism to Hungary, for instance, which is still very low, these are going to come back and they're Going to provide further boost and further demand growth.
So in our The best estimate or the best we can say is that for the foreseeable future, we expect We continue strong economic activity and therefore, in that environment, we expect lower risk costs and Maybe not 14 basis points, but just to remind you, in 2019, So pre COVID, we had 28 basis points risk cost. In 2018, we had 23 basis points risk cost. Sure. I don't see why we would not get we would not be in that ballpark level where we were in 2018 2019 if we are going to have a Similarly growing economic environment. I know it was a long term, but a short question, but We yes.
No, that's very helpful. Thank you. And then just one question on the recent rate hikes that we're seeing in Hungary and Can we get some color about your sensitivity to the higher rates and how you see NIMs evolving into next year again? Yes.
Yes. Well, We have already seen a lower movement compared to the inactivity for a number of years. So The base rate is now at 120 and further hikes are expected. The sensitivity at this level is certainly lower than 6 basis points before, where we started this or 60 basis points before where we started this year. But the further Another 10 basis points would translate potentially around €500,000,000 half annual NII in Hungary.
So we still are kind of we would still gain from further increases in the right environment. There's this increasing uncertainty because we are If there are further rate hikes, then we are entering into a territory where potentially deposit rates might start to grow. And this is This kind of inflection point is relatively difficult to model. But we would still benefit marginally from further rate hikes, even short term and long term, obviously, that's even more the case. And the overall impact on the name should be Positive, obviously, in Hungary, but also in a group level.
In the second quarter, not much of this is actually visible yet. So There is because typically, the pricing takes 3 to 6 months, right, of the variable loans, what we have, Where really the most of the impact comes through. In the Q2, I mean, you could not fully see the impact Of the rate hike so far. So they kind of fully face the impact of what happened so far in Hungary Will be visible in the Q1 next year. Therefore, certainly, the Hungarian name Should improve, and that should have a positive impact on the group level as well.
And it's not just Hungary, it's also Russia, Ukraine where we have increasing rate environment. So I think I'm getting more and more confident in saying that it seems that this kind of long Kind of period of decreasing NIM is over and then hopefully we are getting into A different world, much smaller magnitude, but still visible improvements in the group name And actually, it should happen in the future.
Thank you very much.
Thank you.
Hello. This is Olga Vysilova from Bank of America. Thank you very much for taking My questions, I have several questions today. One question is, do you stick to your interest to your plans to consider M and A in Asia? My other question is again about Russia.
What loan growth would you expect for Russian business in the next once a year. And also when you were speaking about Russian business, you mentioned that you may try to capture more businesses from Other sources rather than the point of sale lending. So do you mean you will consider other types of lending, So consumer lending, not just point of sale? Or you mean non lending businesses? So what exactly do you mean there?
And my third question It's more kind of big picture question. We noticed quite a bit of difference in the tone of Hungarian banks, not only OTP, but banks overall and the regulator. Banks sound quite upbeat, but the regulator extends payment moratorium. It extends dividend ban. It says that the credit risks are elevated when it published its mid year financial stability report.
So why do you think is that? What makes the regulator Staying still, conservatives. And overall, on the dividend limitations, what is the rationale for the National Bank of Hungary
Okay. M and A Asia, I think it has been clear that We have been exploring the core unit in Uzbekistan, And we continue to explore those opportunities and our efforts may come to fruition. We find this country extremely interesting, very kind of early development phase in terms of the banking sector. And young and fast growing Population and in general, strong drives to modernize the country. Seems interesting, but we will see.
So there's nothing concrete I can tell about. The other story which we have talked about was just kind of Maybe doing something in China in terms of consumer lending. But still on the table, as we may enter a joint venture with Some local players, but again, there's nothing concrete I can talk about. The Chinese I mean, the kind of Potential size of the transaction would be much smaller in China. So I don't think that would be From a kind of group perspective, the amount of potential investments we are talking about here It's not big, but nevertheless quite interesting.
Chinese market is extremely Advanced and developed in terms of consumer lending. And this is something we believe we should It will somehow be part of it, so at least see it from what happens there because there's an incredible Service innovation and digital innovation going there. And in many sense, I think they are in years and a half, what we have in general in Europe. So that's certainly a very exciting environment. But If you do something, you're going to be quite careful and modestly, we just naturally Okay.
Again, there's nothing concrete at the moment I can talk about. Russian lending and diversifying. So what I said was that we have quite high reliance on physical physically distributed POS lines through physical agents and this is the segment which is not growing. The online POS segment is growing, so the obvious way to diversify is to increase our share from the online Distributed POS loans and from other online distributed consumer loans primarily, That we started to be active in Kalanik, for instance, in Russia, and that's actually growing quite fast, obviously from a very low base in our case. And we have some other ideas, which I hope you're okay and surprise the market.
Yes. So it's not like it's not fundamentally changing the business model of the bank. It's just Strengthening the focus of other sales channels of pretty much existing products than the physical POS channel, which is Especially during the COVID situation. So this COVID situation overall, not just in Russia, everywhere, accelerated digital So adaptation and therefore accelerated the move from of customer spend from physical Outlets and shops to online, and we have to follow that. And this is something we haven't been As strong and fast so far as we should have.
So this is something we are working on very heavily to improve. So that was the comment I made regarding Russia. So we are not going to be an investment bank, for instance, Russia. So we are not Yes, being away from the current scope. Having said that, corporate has always been a as part of our business there, but this is kind of usual corporate backing.
The regulator and you asked me about my comments On the view of the regulator, I rather not do that. So I'm actually It gives me comfort with the regulator and the supervisor It's conservative and considers potential Negative scenarios. I think that's what they should do in order to protect the financial sector. Having said that, I don't know any fundamental reason why this is the case other than General concern about potential ramifications of the COVID situation, But we don't see that in a way neither In the learned demand or in the quality of our portfolio. I don't know whether they see something which we don't see.
They certainly have not told us, But I think it's perfectly okay and I think it's actually quite good that they are concerned and try to protect the market. I think that's what we should do. I see looking at the I mean, We have gone through this stress test, which is I mean, obviously, you can always argue that it's good or not, so the methodology. We actually think that this is The methodology of the stress test is extremely conservative And then under this conservative stress test conducted by EBA, we did Well, well. So I think that's another kind of objective external view on the potential risk of our portfolio.
So I think, I mean, we feel confident and honestly, the fact that the regulator Kind of is not overly optimistic. I think that's perfectly fine.
Thank you. The next question is from Dagua Kenim, Faucette's Research. Your line is now open. Please unmute your microphone. You go ahead.
Yes, hello. Firstly, a clarification. I seem to have missed your Estimate for the Hungarian rate sensitivity. Can you just repeat the number, please? So 10 basis points increase implies How much additional NIM?
€500,000,000 per year.
€500,000,000, understood. Thank you. Yes. The other question would be the first one is on the Hungarian loan growth. You are flagging retail loan growth, especially you are flagging A pretty strong 60% increase in mortgage lending in the first half, and I'd be interested to hear how you think about the Growth outlook for the second half of the year in Hungarian retail lending.
And another question is on the dividend. I was just reading the Hungarian Central Bank statement, which is out today, And there seems to be that like this general ban on dividends until the end of December, But we are also saying that some banks may be able to pay a dividend and one condition they mentioned is that the capital ratio should not drop. And just given that you are already deducting the dividend, the catch up dividend from your capital, I was wondering whether this statement May imply some room for you to pay the catch up dividend. I would be interested on your thinking around this. Thanks.
Yes. So yes, yes, I mean in terms of the growth trajectory of Hungarian retail volumes, we expect The trend will continue as we saw in the Q2. And I mean fundamentally, we are still if you look at the beneficial ratios, for instance, the housing loan, It's still less than 9% of GDP, right? So it's enormous room for growth there. I think it's fair to expect to go back to the kind of pre COVID growth rates, which we have in 2018, 2019, and they were in the high teens.
So yes, I think we are quite optimistic in terms of Hungarian growth potential, Especially in retail, especially in housing. Now this dividend Comments on the dividend? You very rightly spotted that indeed we have already deducted There's potential dividends from the regulatory capital. Therefore, they are not in our capital ratios either. Look, I mean, we still have I mean, Until the end of September, we are not supposed to even I mean, we can think about this, but certainly, we are not Supposed to make any even conditional internal decisions on dividend payments.
So the previous Kind of guidance what we should do until end of September remains. And then they kind of Sort of extended it to year end with some potential exceptions. So what I can say is that Since we are not supposed to make any decisions, not even conditional on this topic until end of September, we are not making any. So we'll come back to this in October, right? But certainly, we are committed to pay out these dividends.
And If not this year, then next year in the regular kind of course of dividend payment after at the General Assembly. But what exactly it means for us with this new Communication for the Central Bank related to potential early dividend payments. So we can pay a kind of so with that AGM Decision, we can pay Advanced dividends. So that's in kind of normally Thanks, this is an opportunity. Certainly, we will sit down with the regulator in summer in October, and And we'll discuss what they mean and what they expect us.
I don't attach in mass Kind of importance to this, whether it's September, end of the year or kind of the usual Time when dividends are paid. I think we are very transparent about the amount of what we want to or what's being planned to pay. It's deducted from regulatory capital with Turco Banders. That's as much as we can do.
Thank you, Lasse. And just conditionally, if the NMB were to say okay in October To pay the catch up dividend, would you call an EGM and go ahead to pay in Q4 or would you prefer to wait until next year.
In fact, advanced dividend payments can be decided by the Board of Directors. So if it's just advanced dividend payment, then this can be done without an AGM, Definitely. But again, this is all theoretical, and I really don't want to Can I make any comments on this? Because we are not supposed to and we haven't discussed it internally because we have Specific instructions, not correct. So this is yes, situation.
Yes, I understand that. Thank you.
Thank you.
Thank you. The next question is from Anthony Jones
Hello, everyone. This is Robert Dzova from PKO BP Securities. I have maybe a more detailed follow-up question on the Hungarian NII. You mentioned that there were 2 one off items in the first half. I believe that might have been both 1st and the second quarter, the technical effect related to the loan repayment moratorium And the cash loans repricing for regulatory reasons.
And my question is, could you specify how much Did these technical items contribute to the OTP core NII in the second quarter And whether that impact would be continued in the following quarters or that will finish now? So that's my first question. And my second question is on the Stage 2 exposures again in Hungary. If you could elaborate More and what has caused the EUR 90,000,000,000 plus increase, I'm aware it has been due to Technical adjustments, but I mean, which segment this affected most? And why did you decided to make those adjustments after all?
Thank you.
I mean, there's 2 items in the NII. What happened was certainly, I mean, the way it works with the moratorium that we have So these one off losses of the book, we kind of amortize them over in the course of the last. So we book a run off loss when the moratorium is And when this period moratorium Expires, then we start to amortize this one off loss in a way, right? So we increased the NII gradually as if There was no as if there was interest on the accrued interest. Technically, there isn't.
Therefore, we book a one off loss. And then during the course of the loan, we actually I am not sure this one off loss and increase NII. So this is going to stay with us. The other effect is the what happened in the Q1 with the cash lines that Those which were sold last year, for last year, they had a lower rate. So for a temporary period, We had to there was a cap on the amount we could charge on these loans, but that cap Seized to exist from 1st January, so there is a step increase indeed In NII due to higher APR of these portfolios and that continues.
So that's going to stay with us. So these were 2 kind of step ups, but we remain on the elevated level For the future. So if we look at the Stage 2 ratio in Hungary, it increased from 16 point
7
to 17.7 And mortgages was increased like 150 basis points. Consumer loans increased 50 basis points. We monitor this on a monthly basis. So each month, We are on the new assessment, and we look at the relative changes in the creditworthiness of clients. And If this therefore there is some change every month, right?
So and this is coming from our Internal customer rating, right? We have a behavioral rating and if that's facing deterioration, We may change the classification and improve. And if it improves, it kind of Improves the classification, and that's a normal process. So then there's always some fluctuation in these ratios. So it's not that we kind of fundamentally changed the methodology.
Well, we improved it in a way because we now for the entire scope of the retail portfolio of the collective assets portfolio, we have Kind of relative behavior rating based stage migration rules For some portfolios, we've said in the past absolute measures, but now it's So I don't see actually any kind of big movement or irregularity here.
I think, I thought in the light of your comments regarding the cost of risk Outlook and the potential migration from Stage 2 into Stage 1 and given what we've seen in other locations that actually We might we should have seen at least some slight decrease in Stage 2 exposure in Hungary as well, Right. So that's why I was surprised one. Why Hungary runs opposite to other countries in a sense, Especially given the positive optimistic cost of risk outlook. But I understand this is sort of a difficult situation. And may I also once again on the NII structure, what was then the reason for which On the quarterly basis, if we look into the interest revenue split, then the interest revenue from loans, It increased by 1% only, even though the loan book expanded quite rapidly.
So were there some, again, statistical variations in the average loan rate? Or has there been some other In fact, visible in the Q2?
Sorry, in which country?
On the consolidated basis, it's from the Excel file. It increased from 100, just one second.
The net interest income, if you look at this presentation, sir, I mean, net interest income quarter on quarter increased 4%.
Yes, indeed. But the Interest income from loans, it increased from NOK 190,700,000 in the 1st Q to NOK 192,700,000 in the 2nd Q, Right. So the increase from the loan book related interest revenues was much lower than Implied by the loan book growth. And this is, again, on the consolidated level.
I have to look into this. There's also potentially also the an FX effect. You look at Okay. I'll explain that in detail to you, okay. And your first question was so And I'm really still have the moratorium.
So that makes us somewhat more kind of conservative. And also this is what the auditor expects us. So despite the fact that we believe that our Behavioral models, which basically describe The risk profile of our customers not primarily not based on their Loan payments, but another factor is how much revenues they have, how much they spend, what they spend it on and so on and so on. We believe that these are very strong models, but there's still some kind of residue or uncertainty What's going to happen after the moratorium is over with those clients actually participated in the moratorium for more than a year For more than one and a half years, right? And that introduces some extra conservative bits to our methodologies in Hungary.
That might be one of the reasons related to your first question.
Okay, fair enough. Thank you very much.
Thank you.
As there are no further questions, I hand back to the speaker.
Thank you. Thank you very much. Thank you for joining us today. Thank you for your very good questions. I wish you all the best good health.
Enjoy the rest of the summer. And please join us on our next Advantage will be, I think, 5th November, if all right. The usual setup. Good to hear from you then. Take care.
Goodbye. Thank you.